Chicago Mercantile Exchange (CME) traders
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While just about everyone holding stocks has taken losses in the last few weeks, volatility traders are making big money right now.
Uncertainty in the stock market and economy have led all 11 sectors in the S&P lower in the last month. Since Feb.18, the S&P 500 is down 8.4%, while the Nasdaq Composite is down 11.9% in that time.
Those big drops have led to major gains for the Cboe Volatility Index, which is now up 52% over the past month. The VIX, as it is widely known, measures the move in call and put options. It is also often known as the “fear gauge” and spikes during times of volatility.
The volatility index measures buying and selling in the options market.
“We make money when markets are in dispossession,” said Kris Sidial, co-chief investment officer at Ambrus Group, a hedge fund that makes money by betting on volatility. “Many investors increased their exposure to stocks when President Trump was elected thinking the second term would be like the first, they’re now seeing they’re offsides and have to rebalance.”
Whether it is fear of an economic downturn, weaker job creation, tariffs or statements from the government that are causing the uncertainty, investor doubts are forcing stocks lower.
“Markets will have to reset, at least in the short term” said Sidial.
Volatility traders use several strategies, but the main goal is to capitalize whether stocks and options go up or down. Michael Nauss of StatsEdgeTrading explains it like this: “You buy puts and calls for the same strike price at the same expiration date, it’s called bracketing and allows for a trader to make money on both sides of the trade.”
Sidial often uses the volatility index itself as the underlying asset, buying options on both sides of the current market price.
Another strategy, according to Nauss, is to use the increase in volatility to take advantage of higher premiums in the options market, and to sell covered calls. On the other side of the trade, “put buying is expensive right now as investors rush to protect their positions,” said Nauss.
Options, already an increasingly popular part of the market for individual traders, has seen large-scale spikes. The online trading platform Robinhood told CNBC it saw the most volume for options trading ever last week.
Sidial saw this coming and started getting ready to pounce shortly after the election. In an online post in December he wrote: “we’re seeing a variety of players – from foreign pensions and domestic RIAs to even hedge funds- dusting off their 2016 playbook in anticipation of Trump taking office.” He went on to predict “any pullbacks are likely to bring strong volatility performance.”
Nauss is following technical indicators and believes stocks are so oversold that any “good news will jumpstart the markets in the next few days.” He then added, “What happens after that, I have no idea.”
