Why the Short Volatility Trade Is Back and Bigger Than Ever

Popularity Surge

Kris Sidial, Co-CIO of Ambrus Group, highlights the resurgence of short volatility trading, noting its widespread acceptance and popularity. He explains that the net short Vega notional is now twice as high as it was in January 2018, just before the "Volmageddon" event 1. This surge is driven by the increased use of derivatives like one- and zero-day options, despite the potential for major disruptions in the market 2.

The netting short exposure is two times higher than where it was during January of 2018, which is right before volume.

--- Kris Sidial

Sidial also points out that the assets under management in derivative income-generating funds have increased tenfold since 2018, reflecting the strategy's growing appeal 1.

   

Strategy Explored

The strategy of short volatility trading involves betting on market stability, which often pays off due to an embedded risk premium. Kris Sidial describes how this approach can lead traders to develop poor habits, as they become accustomed to winning most of the time 3. However, when the market turns, these traders can face significant losses, akin to "picking up pennies in front of a steamroller" 3.

It's like being rewarded for buying the dip. If you do it over and over again, you're going to feel this conviction towards it.

--- Kris Sidial

The discussion also revisits the "Volmageddon" event of 2018, where the XIV ETF collapsed, highlighting the risks inherent in short volatility strategies 4.