Investors Pour Billions into Risky Short-Volatility Bets, Raising Fears of Another 'Volmageddon'
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Investors are pouring money into short-volatility strategies again, with $64B now in funds that sell options to juice returns. This recalls the 2018 "Volmageddon" rout.
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New income ETFs differ from old short-vol funds. They sell calls/puts for income atop a long stock position rather than directly betting on low volatility.
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It's hard to quantify the total short-vol exposure, but signs like surging trading volumes and dispersion trades suggest it's grown enormously.
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The boom may be suppressing volatility measures like the VIX, though the calm market has alternative explanations like steady gains and short maturities.
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With risky events ahead and leverage abounding, many worry these bets raise instability risks and could compound any selloffs. The longer calm lasts, the more violent the reaction could be.