One of the themes we have been covering on Ask Brokers lately is the “extreme” positioning across assets. In early October we reasoned why a long VIX could be the optimal hedge for a possible market increase in volatility. Part of the argument was the fact so many had piled into short vol strategies, something that works 99/100 times, but when it cracks it often leaves people in tears.
This typically occurs when markets get complacent and start pricing only daily moves and do not consider other risks such as various macro risks. Since October a 3rd of the markets have sold off sharply and volatilities have spiked massively. The selloff forced short volatility strategies to run for protection, both by buying vol, and later as vol got too expensive, these types of strategies had to puke deltas (cash hedges) on lows, just to reduce the delta risk. This has probably been the biggest reason for the recent sell-off.
With the latest data out from the CFTC, we can now see the VIX move higher has made those VIX shorts close rapidly. Net non-commercial VIX futures spiked dramatically during the sell-off (white line).
Another space with rather “tilted short” positioning is gold. Note the (still) relatively small pop of those shorts as the recent squeeze seems to have taken shorts by surprise. Watch the 1230 level in gold, as a potential close above that level might bring those shorts to a similar VIX cover mode.
Gold broke above the trend line holding since April highs during this last big move up. It has since then been sitting around these levels. Given the positioning, still many shorts, this crowded trade could get fluid should the 1230 level be taken out.
Crowded trades could once again prove to be lethal.