Traders keep betting on Low VIX. Market participants continue making wagers on recent market lethargy continuing as positioning in short VIX trades reaches record highs.
With the VIX hovering around levels not seen in several decades and for longer than ever before, implying that markets are not expecting any significant shift in stock market volatility for at least the month ahead, traders shorting the VIX have been selling VIX futures aggressively, putting net short positions at the highest level on record last week.
Based on VIX futures positioning, traders have never been so bullish that volatility will not spike over the next few weeks.
Chris Weston, chief market strategist at IG Markets said, the reason for this confidence comes down to several factors, including predictable central bank policy, low inflationary pressures, solid corporate earnings growth and the synchronised global economic recovery that’s been seen this year, among others.
He also says that selling volatility, or “vol” for short, “has been one of the big macro trades of 2017, specifically from systematic, rules-based hedge funds”.
However, whilst the short VIX trade has worked well recently as lower volatility helped to produce strong gains in riskier assets like stocks and corporate bonds, Weston says that record levels of short VIX positioning could present a problem should volatility suddenly return.
Low VIX, Systemic Risk?
Similar sentiments towards the low volatility environment and market lethargy were discussed by luminaries like Larry Fink, The BlackRock Inc. chief executive, who said a political event could cause “a pretty large setback” and that if volatility rose to normal levels, there could be as much systemic risk as in 2007, the early days of the financial crisis. Fink illustrated a possible major political event with the example of Richard Nixon’s resignation in 1974 following the Watergate scandal.
Both market volatility and investor complacency are at, or very near, all-time-highs. In the past, these lethargic environments have been extremely comfortable in the moment but have had a strong tendency to become very uncomfortable very quickly. In fact, extreme cases such as the market tops in 2007 and 2000 were on the back of a landscape very similar to the current one.
The VIX closed at 9.85 on the 16th, marking the longest time spent under 10 in it’s history.