Go home & get your shine box

An article in FT caught my attention with a clever headline:

Why the new shoeshine boy trade is shorting volatility

It immediately reminded me of Goodfellas. The basis of the article is comments from Christopher Cole of Artemis Capital. His pieces are well researched and always interesting. His original piece can be found here and I recommend reading it!

One argument Mr Cole makes is that the market can simply be broken down into short and long vol trades, whether people know it or not. I have said before I believe that is the case, too much money and not enough ideas.

ShortLong Vol

Another observation is the volatility regime that exists in Japan where volatility is used as an income enhancement or carry trade. This resulted in lower volatility with high risk of extreme spikes. I believe that is the regime we are currently in.


But another outcome that should be considered is the volatility regime of the late 90’s or the right-tail regime that Mr. Cole describes. This was a period where both S&P and volatility rose in unison. This would frustrate a large number of short volatility players as they are losing money when the market rises, and from experience that is very difficult pill to swallow. In my trading I have converted to shorting SPX put options and actively hedging with stock to take a more directional view on the market.

Additionally JP Morgan had an interesting chart of the correlation between net exposure of the VIX ETPs and the Term Structure. It seems to corroborate that indeed long XIV, SVXY, short volatility is a crowded trade and significantly effecting the roll yield.

VXX AUM vs Term

It will be hard to balance carry and ‘crisis alpha’ trades but I believe if one has the patience, the carry alpha can be significant as the spikes could be more extreme. Trying to balance both is proving to be challenging…

~ by largecaptrader on March 10, 2014.

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