A trade that blew up in the market’s face six years ago, saddling investors with billions of dollars of losses, is making a comeback in 2023.
Investment analysts who focus on the equity derivatives market said the trade is one way to generate returns in a sideways market. Traders can bet on the direction of the Vix using call or put options, or by buying or shorting futures contracts linked to the index.Another reason it has worked so well in 2023 is that the Vix has been trading below its long-term average for most of the year, with a few notable exceptions.
“Every time we go through a period where the market sees heightened risk ahead, but the market doesn’t move in a violent way, it improves the case for selling volatility.” Investors in short-Vix products booked billions of dollars in losses that day, and at least one of the ETFs didn’t survive. Credit Suisse ultimately recalled its popular VelocityShares Daily Inverse Short-Term Exchange-Traded Note after its assets were almost entirely wiped out. Angry investors ultimately sued over the incident.
Betting against Vix options or buying put options on the Vix aren’t the only options for investors looking to profit from the short-volatility trade. One option is selling covered calls against individual stocks held by an investor. This allows investors to book regular profits, squeezing more yield from shares in stocks they already own.