What If Reddit Targets The Volatility Complex?

What If Reddit Targets The Volatility Complex?

Will the retail army target the VIX complex next? That's a question we probably shouldn't ask. Because that might "give them the scent," so to speak. I'm just kidding. At this point, the tale of the marauding Reddit "warriors" writes its own punchlines, and I can't help but indulge. On Monday, SocGen's equity derivatives team cautioned that in addition to possible "further de-grossing in hedge fund balance sheets," last week's events could also "manifest in another pullback from vol sellers."
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14 thoughts on “What If Reddit Targets The Volatility Complex?

  1. Reddit/RobinHood can only move significantly small markets such as GME. There are
    a lot of VOL longs because people are afraid of a correction……Reddit/RH traders
    won’t have much effect on VOL……..too much arb holding it to appropriate levels.

  2. The “they” already have the scent … In watching the Predators (animal type) they work in consortium and they don’t always attack mice and rabbits.. Let us assume for sake of argument the target is the Banks… The attack singles out the weakest and concentrates on it’s Achilles Heal … The system sees it’s storm clouds and that is rightfully so….We will see a very interesting set of reactions anytime now..

  3. I would really appreciate some help understanding this. (I’m just a simple equity guy.)

    VIX options and future settle in cash. VIX is a number calculated from S&P500 index options pricing. What is the mechanism for trades in VIX derivatives to move VIX?

  4. The big risk is a bull raid on the equity vol complex, if large and long lasting enough, will likely carry over to wider credit spreads. One of the big risks of the tail wagging the dog market structure we have.

    1. Now, wouldn’t that be interesting? So much has been allocated to “risk parity” and other vol-driven models. Imagine if the little minions stepped in and forced up vol enough to forced them to liquidate? A self-reinforcing death spiral might ensue.

      But, I doubt they have the firepower or will to do so.

      Recall when then the FAANGs and such were driven up one recent summer, it was proclaimed that it was the work of the RobinHooders. Nope. Turned out it was Softbank, a serious player with billions behind them.

      Plus, it’s not a simple, explainable theme like “Gamestop is about to pivot to online sales. Think about all of their customer info.” Just like BlockBuster Video did!

      Anyway, it’s fun to watch.

      I just hope they don’t push silver up to $60. It’ll be an inconvenience to go to my bank to fetch my beautiful Swiss silver ingots (complete with certificates) out of a safe deposit box to sell.

      1. On that topic, I asked it here once before and received no answer,

        Just how well have the vol-driven strategies been doing?? I’m truly curious about the performance of the risk-parity and other vol strategies

        Have they been super performers or are they more akin to the much-touted “Unconstrained” bond funds?

        Do any of you have access to those numbers???

    1. I guess the mechanism is they buy calls on UVXY, which is a 1.5x exposure to near-term VIX futures. If you can create a gamma squeeze (as UVXY is a very convex instrument, so it’s very risky for dealers being short), it would force notional buying of underlying VIX futures well in excess of the outlay of the UVXY calls.

      1. Sure, but how does buying of VIX futures move VIX?

        VIX futures and options are cash settled, no one delivers a “share of VIX”. You don’t delta hedge a VIX option by buying a “share of VIX”. There is no such thing as a share of VIX, VIX is not an asset, VIX itself has no monetary value.

        VIX is a calculation of the implied vol of SP500 index options. Somehow, buying VIX futures has to change SP500 index option prices, to change VIX.

        I’m asking, what is that mechanism? Where is the reflexivity?

        Sorry if I’m being dense here. Before I factor something into my investment thinking, I have to understand how it works, at least in concept.

        1. Not an equity options specialist (i work in fixed income), but If i were to guess, it would be that VIX futures are used to hedge vega of calls and puts of various strikes, so a blowout in VIX futures (cost of hedging, both in terms of level and negative roll) could easily result in higher option premiums, therefore higher implied vols, therefore higher spot VIX.

          Hopefully someone can correct me if I’m wrong.

          During Volmaggedon in Feb 2018, spot VIX still blew out much more than front-month VIX futures despite the short VIX ETNs being futures based.

          1. Thanks! I’m (obviously) not an options guy. It seems to me that increasing the cost of holding an asset should normally depress the value of the asset, so increasing the cost of hedging could decrease option prices if it has any effect. But anyway, it is useful for me to see one possible mechanism and how first-, second-, or third- order it might be.

    2. You’re right that you can’t “buy” VIX, but you can hedge it by buying what’s makes up the index.

      The VIX is effectively the weighed sum of impled volatilities of the S&P500 components.

      You can hedge the VIX futures with VIX-tracking ETFs. Buying VIX-tracking ETFs generally makes you the owner of a collection of options. Higher demand for those products drives demand for options, which increases impled volatilities.

      So the futures and the VIX are tied together through arbitrage: if the ETFs deviate too much from the futures, you can arbitrage the difference. So increased demand for either is increased demand for both.

  5. 12month total returns based on some S&P risk parity indices I found on Bloomberg:
    15% vol target: +16.6%
    12% vol target: +14.0%

    The above performance was broadly in line with a typical US 60/40
    For a slight variation on the theme, WisdomTree’s NTSX (90/60 US stocks/USTs) returned 21% over this period

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