Last year there were a few stories that came across the desk regarding the juniorization of firms and how removing experienced senior personnel could present risks of its own. After all, if you came into the markets in the 2010s, how would you have experience with crazy drawdowns? (Myself included.) Maybe some are ahead of the curve and have at least seen Trading Places.
Well, a lot of staff just gained some experience.
The options and volatility stories of the last few days are intertwined and generally fall into the following storyline in some way:
1) Markets finally welcomed volatility back on Monday (the ensuing whipsaws have been fun, too), which led to
2) the short volatility trade unwinding. That
3) impacted volatility-linked ETPs leading to
4) trading halts and concerns about those volatility notes and funds and their managers/issuers/providers. Due to the overall rout, of which this was just one part,
5) trading is/was brisk which means, finally, liquidity providers are smiling.
There’s a lot of what feels like surprise surrounding the aforementioned ETPs when none of this is news per se. It’s not like there weren’t prospectuses available to read. Plenty of others have wondered aloud how much people understand what could happen to their darling-of-the-moment trading vehicles.
Short volatility concerns are not new. Just one example comes from Artemis Capital’s outlook Volatility and the Allegory of the Prisoner’s Dilemma back in 2015: “The great unknown is that this massive short volatility animal that appears tame given a regular diet of central bank liquidity may turn wild when that liquidity is removed. The wrong ‘risk- off’ event may expose a hidden liquidity gap in the short VIX complex that could unleash a monster.”
Just a few weeks ago Carmot Capital and Incline Investment Management noted something similar (link to PDF) – “The central banks have already herded investors into a narrow canyon of short volatility strategies. By suppressing volatility, the Central Banks made investors all feel like Nobel laureates by making explicit (short VIX, option writing) and implicit (risk parity) short volatility strategies excellent yield generators. Too bad these investors are now running LTCM clones—generating a positive yield while things are normal, and an extreme downside when they aren’t.”
Riding the elevator up to the office Tuesday morning netted a conversation about the whereabouts and mental state of that infamous former Target logistics manager who day trades VIX products. It was last August when the NY Times put out the article – Day Trading in Wall Street’s Complex ‘Fear Gauge’ Proliferates – that mentions him. That example clearly struck a chord, and the elevator ride was not the first time Mr. Seth Golden has gotten a mention in the time since the story came out. Of course, if you’re a Patriots fan AND had a large short volatility position, you probably have it worse than Seth.
But wait, there’s more! VIX Sellers Wait Out the Storm to Drive Volatility Lower Again.