Vol Sellers Branch Out

By now most of us are fed up with hearing apocalyptic warnings of the coming VIX disaster when all the naïve short sellers will be squeezed in an epic 2008 style equity crash. Either you buy this argument, or you don’t. No sense wasting too much more time on it. I am of the opinion that for all the uninformed XIV buyers (the short VIX ETF), there are stacks of VXX longs desperately trying to catch the next great VIX rise. But, who knows? I might be wrong, and I definitely am not privy to the extent of institutional equity index volatility selling, so maybe there truly is a massive weak short position whose comeuppance will soon be laid bare for everyone to see.

But yesterday I had dinner with a buddy who passed along some interesting information that caught me by surprise. He is a unique individual. A former derivatives broker who didn’t trade with pension funds and other typical institutional clients, but instead specialized in high net worth individuals and non-traditional corporations. His clients could definitely be described as sophisticated, but with an entrepreneurial, non-traditional flare.

He still keeps in contact with his old shop, and he told me what the brokers are experiencing. Across the board, clients are engaging in volatility selling strategies. And although they are shorting some stock index volatility, they are not limiting themselves to equities.

He described an endemic pattern of these sophisticated clients shorting gold vol, euro vol, bond vol – any listed options, these guys are shorting them. Take gold for example. They pick a three month option, and with gold trading here at 1245, they sell the 1145 put while simultaneously selling the 1345 call. Lever up the position, collect the premium, and let the quiet markets pad your bankroll. And clients are doing this strategy in size.

I was surprised. I didn’t expect the volatility selling to extend to most other financial markets. I had thought it was confined to equities, but I was obviously wrong.