Volatility Trade Obsesses Market as VIX Note Does $6.5BInyoung Hwang and Sofia Horta e Costa
How fixated are investors on volatility? Consider that an exchange-traded note tied to stock swings that didn’t even exist six years ago saw more volume yesterday than Microsoft Corp. and Coca-Cola Co. combined.
The iPath S&P 500 Short-Term Futures ETN, whose value has risen 34 percent as the Standard & Poor’s 500 Index had its worst selloff since 2011, saw a record 156 million shares worth $6.5 billion change hands. On the Chicago Board Options Exchange, futures tied to stock turbulence traded 616,906 contracts on Oct. 14 and 791,638 yesterday, the most ever.
Surging bets on volatility show how desperate professional traders are to cushion losses in a market where almost $2 trillion has been erased in a month. Trading in futures on the CBOE Volatility Index, which cost more than $22,000 apiece, are signs institutions are rushing to hedge after the S&P 500 lost more than 7 percent since Sept. 18.
“That’s almost entirely institutional-based -- volatility hedge funds, very large pension funds with volatility allocations, and professional broker dealers,” Dominic Salvino, a specialist on the CBOE floor for Group One Trading, the primary market maker for VIX options, said by telephone, referring to futures on the volatility index. “Volatility is the asset class of choice right now.”
Large speculators that piled into popular stocks have seen losses balloon as the rout has worn on. Netflix Inc., the online movie company, tumbled the most in two years today after saying a price increase slowed subscriber growth. More than 20 percent of its stock is owned by hedge funds.
An index of companies with the highest concentration of hedge-fund ownership compiled by Goldman Sachs Group Inc. fell more than 10 percent from the start of September through yesterday, while the S&P 500 lost less than 7 percent.
Owning instruments that appreciate as the market swings, known as going long volatility, is a way of countering future losses. The VIX jumped 154 percent from its low in July to a two-year high yesterday. The gauge moves in opposite direction to the S&P 500 about 80 percent of the time.
“More investors are positioning to be long volatility, reflective of general concerns and anxiety in the market about prospects for risky assets,” Anand Omprakash, an equity-derivatives strategist at BNP Paribas SA said by phone from New York. “With the VIX breaching levels not seen since June 2012, many volatility-related instruments have seen increased interest in recent days.”
The rush to hedge has been accentuated because institutions were lulled into complacency by one of the longest periods of market calm on record. For 62 days in May, June and July, the S&P 500 failed to post a gain or loss exceeding 1 percent, the longest stretch of calm since 1995.
Ways to speculate on how noisy or calm the stock market will be have exploded in the last decade with the advent of exchange-traded notes tied to the VIX. Strategies include relatively simple hedges against equity losses, such as owning a security that mimics the volatility gauge.
The most popular of those, the iPath S&P 500 VIX Short-Term Futures ETN, has seen average daily trading of 66 million shares since Sept. 18, compared with 42 million in Microsoft and 20 million in Coca-Cola.
Yesterday’s volume on the iPath note was more than twice the 20-day average and four times the six-month average, data compiled by Bloomberg show.
“This is a very adequate way to protect your portfolio without having to sell all your holdings,” Robbert van Batenburg, director of market strategy at broker-dealer Newedge USA LLC, said by telephone. “Some people might already have losses on their positions, but they’re not seeking to unwind here at what they deem to be depressed prices.”