Rising level Of Greed In The ‘Short-Volatility’ Trade
Rising level Of Greed In The ‘Short-Volatility’ Trade: Tom Essaye Quoted in Business Insider
Stocks are vulnerable to a 5% ‘air-pocket drawdown’ as greedy traders short volatility, research firm says
“Stocks on Tuesday seemed to have an additional influence weighing on the broader market,” Tom Essaye, the founder and president of Sevens Report Research, wrote in a note on Thursday. “It turns out that it did… an overcrowded short side of the options market which was reminiscent of the 2018 ‘Volmageddon’ event.”
“Based on the magnitude of the move in VIX futures on Tuesday, there is an increasing threat that the rising level of greed in the ‘short-volatility’ trade, similar to what we saw in 2018, could result in an air-pocket drawdown of 5% or more in the S&P 500,” Essaye said.
“The rebound in interest in short-volatility strategies is once again posing a risk to the broader markets here as a negative catalyst can clearly spark a momentous, derivatives-driven selloff in the broader stock market like that which we saw in 2018,” Essaye said.
“Going forward, these expirations will remain dates to keep in mind as the threat of volatility will be elevated as we move further into 2024,” Essaye said.
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