Analysis-Traders lose billions on big volatility short after stocks routLONDON - A wager that stock markets would stay calm has cost retail traders, hedge funds and pension funds billions after a selloff in global stocks, highlighting the risks of piling into a popular bet.
Billions flew in from retail investors but the trades also garnered the attention of hedge funds and pension funds. On Wednesday, the VIX had recovered to around 23 points, well off Monday's high above 65, but holding above levels seen just a week ago.One driver behind the trading strategy's popularity in recent years has been the rise of zero-day expiry options - short-dated equity options that allow traders to take a 24-hour bet and collect any premiums generated.
A popular hedge-fund trade played on the difference between the low volatility on the S&P 500 index compared to individual stocks that approached all-time highs in May, according to Barclays research from that time. Post-2008 regulations limit banks' ability to warehouse risk, including volatility trades. When clients want to trade price swings, banks hedge these positions, the BIS said. This means they buy the S&P when it falls and sell when it rises. This way, big dealers have "dampened" volatility, said the BIS.
Barclays and Bank of America declined to comment. Goldman Sachs did not immediately respond to a request for comment.
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