Are VIX Bets Too One-Sided?

Bets against the VIX recently got drilled, and that could have bullish implications for the market

Sep 18, 2015 at 8:49 AM
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Unless you first showed up a couple weeks ago, it's been a somewhat ugly year. We sat in a seemingly endless range that ultimately ended with a thud.

So, it's not that surprising that traders and investors have gotten a bit bearish and defensive lately. But the numbers have gotten a bit tilted recently. There's this:

And there's this from The Wall Street Journal:

"Bets on higher stock-market volatility are at a record high, signaling increasing concern about the outlook for U.S. shares.

"Wagers by hedge funds and other speculative investors that futures tied to the CBOE Volatility Index will rise outstripped the number of bets on a falling VIX by 37,925 contracts as of Sept. 8. That's the biggest net bullish position on record, according to Schaeffer’s Investment Research's analysis of data from the U.S. Commodity Futures Trading Commission going back to 2005."

And, hey, judging by the source, you know it's a good number! The interesting part is that it's not due to an increase on long CBOE Volatility Index (VIX) futures bets; rather, it's due to a large decrease in short VIX futures bets. Time was not that long ago when the "wise guys" were minting coin shorting VIX derivatives. And it's a sensible idea in that risk is perpetually overpriced.

I joke that everyone everywhere always expects an increase in volatility. Well, the markets behave that way, too -- futures almost always trade in contango and the whole curve is almost always at a premium to VIX itself. That all changed a month ago, and the bets against VIX got drilled. If you like the insurance company analogy for put selling or VIX call and future selling -- well, it's like they collected premiums pretty seamlessly for a while, then got swamped with endless claims all at once. It kind of figures that they'd get a little cautious selling future "policies."

What's it mean? Well, if you're a contrarian, it's somewhat bullish for the markets, as it suggests "bets" got a bit too tilted in one direction. On the other hand, you could make the argument that that's why we've done a bit better market-wise recently. So, perhaps it's already baked into the market to some extent.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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