Odd Lots Why the Short Volatility Trade Is Back and Bigger Than Ever
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Jan 29, 2024 Kris Sidial, Co-CIO of Ambrus Group and a volatility trading expert, dives into the booming short volatility trade in today's financial landscape. He discusses how investors are increasingly betting on low volatility, even amid rising market risks. The conversation covers the rise of ultra-short options and their implications for market stability. Sidial also highlights the strategic shifts institutions are making in response to these trends, making it clear that navigating this complex environment demands sophisticated approaches.
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Current Volatility Landscape
- Net short vega notional, a measure of volatility exposure, is currently twice as high as before the 2018 Volmageddon.
- Derivative income funds, focused on profiting from volatility, have also seen tenfold AUM growth since 2018.
Short Volatility Explained
- Shorting volatility is a bet that markets will remain normal and is often profitable.
- However, this consistent success can lead to overconfidence and poor risk management.
Derivatives Usage Increase
- Many institutions increased derivative allocations following the 2020 market volatility and 2021 meme stock events.
- Shorter-dated options create an illusion of reduced risk but ultimately carry similar exposures.