Wednesday, April 12, 2017

Mega Crash Is The Last Momentum Trade

What else?

The S&P 500 is down -1.3% in the past five days, implied volatility is up 50%. It appears that Mega Crash is the last momentum Trade...

First the Nasdaq 100 (Apple, Amazon, Facebook, Google, et al.):

I have three theories why implied options volatility is massively outperforming the indices...

1) Japanese Nikkei
As we've seen many times before, U.S. volatility is tracking the Nikkei closer than it's tracking the S&P 500:

2) Large U.S. banks

3) Short-covering in volatility ETFs is driving up volatility

WSJ: Traders Creating A Volatility Feedback Loop
"The slump in volatility has forced big money managers to change their approach to insurance. They used to buy insurance in the form of options contracts to protect their portfolios against sharp moves. Now, they are selling it."

Indeed, volatility in the S&P 500 in the first quarter of the year was the lowest since 1965

Selling insurance, on the other hand, has been great business—and more money managers are piling in. “Our philosophy is always to be short volatility”

And now they're getting squeezed...

UVXY weekly volume with VIX
The tail is wagging the dog:

4) All of the above...

At this current ratio, a -10% move down puts the VIX at 80, which according to the feedback loop theory, will lead to a somewhat "larger" move lower in the index, so on and so forth...

Margin of error: ZERO

Here is another problem, related to the USDJPY implosion taking place right now.

Japanese Yen shorts (red) are a tad exposed right now, as they are way behind the curve on covering. They didn't anticipate that Trump would unwind his own dollar trade...