How Broken Is The Vol Complex?
I've talked at length over the past year about imbalances in the vol complex and associated extremes in "crash" pricing.
Admittedly, vol market "brokenness" is a kind of fallback theme for me -- a perpetual topic du jour that always "works." It's an engaging subject.
The above-mentioned extremes are still evident. Nomura's Charlie McElligott described crash pricing as "eye-watering" across US majors earlier this week. Again, it's part real angst and part "bad" optics tied to supply/demand mism
OK bear with me here as I attempt to learn and summarize… Do I have this correct? Because the expected correlation of long-dated US Treasury PRICES to Equity Prices has flipped from negative to positive (i.e. they’ll both go down together, given the current set-up), you can’t properly hedge an equity portfolio with long-dated UST’s. So… you have to use something else. That something else is either: (a) SPX/SPY OTM Puts, (b) VIX futures, or (c) OTM Calls on VIX futures. So now there’s a bunch of money consistently flowing into these instruments, relative to “before”. And the counterparties on the other side of these trades can only bear so much risk in their books, so everything is bid to the moon, irrespective of ongoing gaps between realized-vs-implied vol’s. Is this why the vol market is “broken” ?
H-Man, once again you have wandered off into MCE speak, which and I most of your readers find unintelligible. It seems his tactical approach is to follow flows based upon positioning which has a domino effect . Most of the time his comments about flow are very accurate and his view on how flow effects the domino’s. His comments do make you think. So if you trade flow, probably a guy you want to listen to.
But if want advice on the macro, not the guy. K-Man wins that award.
So thanks for sharing a lot of views.
This article is marvelous!
The main graph could be read as: “people are freaking out too much and are possibly missing the right tail (>105%) risk” or, “spot hasn’t fallen enough for people to start bidding up the right tail risk”. I wish I could zoom in closer in the graph to see if there is a lag between gray and red lines.