DERIVATIVES-VIX shorts hit new record

LONDON, Aug 8 (IFR) - Net short positioning in the CBOE’s VIX volatility index futures has hit record highs as investors continue to position for a further decline in the index, despite it trading at historic lows.

The latest Commitments of Traders report from the CFTC, released on Friday, showed that speculators including hedge funds and asset managers held a net short of -158,114 contracts – beating the previous record of -143,845, that was hit in mid-June.

The data comes in spite of Wall Street’s “fear gauge” falling back into single-digit territory in recent sessions, defying an array of economic and geopolitical concerns. Two weeks ago the index touched 8.84 in intra-day trading – a record low – after the US Federal Reserve kept interest rates on hold.

“It isn’t surprising to see the VIX where it is given that we’ve seen realised volatility at four or five for days in a row, but to have this low volatility regime is quite surprising considering geopolitical risk in Korea and Qatar and economic disappointment with Trump failing to deliver on his promises,” said an equity derivatives head at a European house.

“We’ve never seen such uncertainty at the macro and geopolitical level and at the same time have the volatility of equities below the volatility of bonds five years ago.”

The CFTC data show that 337,590 short contracts outstanding - a reduction of just over 1,000 contracts on the previous week – was offset by a dramatic slump in long positions. Contracts positioning for an upside jump in vol fell from over 200,000 to 179,476 on the week.

Extreme positioning reflects ongoing demand for the volatility carry trade, which sees investors monetise the gap between realised and implied volatility. That gap has proven to deliver more lucrative returns in times of low volatility, as options implied vol is typically floored while realised vol can slump much lower.

“Central banks have completely collapsed the level of sovereign bond yields and that has translated into corporate bonds and mortgage-backed securities so people do not have so much product to get some yield,” said the equity derivatives head. “People are reluctant to buy US equities given the high valuations so they are happy to sell volatility as a way to get yield, and the premium between implied and realised is still there.”

According to data from Societe Generale, one-month realised volatility on the S&P 500 currently stands at a historic low of 4.1%, compared to at-the-money implied volatility of 7.9%. One-month VIX futures are currently trading at 11.13, according to CBOE data.


Amid the apparent calm, however, investors are positioning for a potential volatility jump through the VIX options market. Open interest in VIX call options, which pay out when the index rises, stood at 466,000 – outstripping put options on the index by more than four times. That is close to the historic highs for the ratio, according to analysts at JP Morgan.

That contrasts with put/call ratios on S&P 500 options, where downside bets have been rising for much of the year, but remain at twice the level of upside options and well below June highs.

“There is more extremity in the former [VIX options] implying greater demand for hedging against equity tail risk or a volatility spike relative to hedging against a typical equity market correction,” said Nikolaos Panigirtzoglou, global asset allocation at JP Morgan. (Reporting by Helen Bartholomew)