Yesterday, as the VIX was setting up for one of its biggest one day jumps in history, we reminded readers just how massive the short-vol overhang was courtesy of the following chart from JPMorgan showing that the net Vega on VIX-related ETFs was at an all time high, suggesting that the risk of a vol-buying feedback loop was significant, because as VIX rose and markets fell, it would prompt more vol-shorters to cover, selling more risk assets in the process, leading to an even higher VIX, and so on.
So what happens next to the VIX, and the vol-complex in general? Below we share the latest thoughts from RBC’s head of cross-asset strategy, Charlie McElligott, who notes
WITH THIS MUCH NEGATIVE CONVEXITY FROM A LOW ABSOLUTE LEVEL… IT SURE DIDN’T TAKE MUCH TO ‘SET IT OFF’: So this is awkward: the hedges pushed last week ‘hit’…but with the ‘wrong’ event-risk catalyst.
Yesterday was pure ‘comeuppance’ for the ‘short vol’ / ‘negative convexity’ crowd, off of the crescendo-ing cacophony of self-fulfilling expectations for a market ‘volatility event.’ I know this sounds ‘chicken or the egg,’ but I truly believe that it was this volatility positioning which was the core of the issue yesterday, and not wholesale buyside de-risking of underlying core portfolio longs as the catalyst.
This post was published at Zero Hedge on Aug 11, 2017.
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