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Thinking

Everybody’s Doing It: Short Volatility Strategies and Shadow Financial Insurers

The extraordinary growth of short volatility strategies creates risks that may trigger the next serious market crash. A low yield, low volatility environment has drawn various market participants into essentially similar short volatility-contingent strategies with a common non-linear risk factor. We discuss these strategies, their commonalities, and the generally unrecognized […]

Sell Duration To Hedge Equities

Yes, you read that right. The risk asset market today is one very highly levered yield trade. Whether you look at FAANGs, Nasdaq, EM equities, High Yield, short volatility strategies or even long Treasury bonds, the juice that keeps asset price appreciation going is the low level of yields. Common […]

Here Comes the Melt Up! Spot Up, Vol Up

Option traders implicitly believe that when the stock market goes up, volatility falls, and when the stock marketfalls, volatility rises. This assumption, which is based on years of empirical data, is implicit in many of the volatility-based strategies that have become common place today. To mention a few: volatility targeting, […]

Is The ‘Shadow Insurance’ Business As Dangerous As The ‘Shadow Bank’ Of The Financial Crisis?

There are a number of striking similarities between financial markets before the 2008 financial crisis and today. The most obvious is the low level of volatility. While everyone’s favorite indicator of risk taking is the VIX, other metrics of risk and uncertainty are even lower today than they were in […]

Watch Out For Volatility Tourism And The End Of The Summer Calm

Summer will soon be coming to an end, and in the beautiful beach town of Laguna Beach summer tourism is reaching its crescendo like it does every year. This year, however, with booming equity markets, a general feeling of well-being, and little in the form of risk of wars and […]

The Perils Of Selling Volatility When Volatility Is So Low

Once the piece I wrote yesterday went online (“Why Is Volatility So Low and What Should We Do Now?”), I received a number of questions on why now is the time to quit selling volatility and be careful. Couldn’t we have said the same thing a few months, or maybe […]

Why Is Volatility So Low And What Should We Do Now?

Last week the VIX closed at one of its lowest levels in recent history. Why? And what can we do about it? In my view, there are a number of inter-related reasons why option prices and option implied volatility are so low, and they might suggest some ideas for portfolio […]

Three Tails Today: Fed, Fiscal and Frexit

If we look for macroeconomic and political conditions today that have the potential to result in large moves in the markets, three interrelated events immediately come to the forefront. The first is the Fed. Looking out to next year, will the monetary policy path end up being too hawkish, or […]

How To Position After This Market Surge? Follow Logic

Why is it that oftentimes markets move first and the economic justification (and punditry rationalizing the outcomes) follows? It is well known in the psychological literature that humans tend to favor consistent narratives. I am not a psychologist so will not dig deeper here. But if you scan the writings […]

How Should We Invest When Forecasting Becomes Tough? A Case For Protected U.S. Dollar Assets

When we look back at 2016, some very strange and counter-intuitive things happened in sequence. We believe this phenomenon will repeat in the years to come, and market participants just have to get used to investing with decreasing certainty in the background. First, both with Brexit and the U.S. elections […]