Don´t Confuse Direction with Pace 2.0
Markets have been absolutely crazy since the sell-off started in October.
One of our main themes has been the crowded trades that have been blowing up. Among the biggest trades to blow up have been the short volatility trades going into the sell-off in early October. On October 2nd we suggested that “VIX is the best global hedge…”. This quickly proved to be very true. We saw VIX go from 12-13 to 25 with local intraday spikes to almost 28. During this time short gamma and short vol strategies imploded totally.
As volatilities had exploded, we shifted our stance and suggested that the panic had got ahead of itself and that “volatility was priced too rich…”. What usually happens when markets sell off hard and volatilities explode is the fact that people tend to confuse direction with pace, leading to investors buying protection at “wrong” levels and pay too much for hedges.
Over past days all global equity related volatility has been moving lower, accelerating over past 24 hours as uncertainty over the midterm elections is gone.
We still haven´t got the updated VIX futures positioning, but we would not be surprised if the crowded shorts actually did reverse into long volatility trades, causing even more P&L pain.
Chart of VIX.
Charts of Eurostoxx 50 vol index, V2X.
Source: charts by Bloomberg