“Short Vols,” A Way To Bet On Market Momentum

By: Jake Keelen-Brown | jlb7226@psu.edu | February 5, 2019

On Tuesday, The Wall Street Journal reported on the increased interest in Short Volatility trades. These trades also known as “short vol,” have taken an upturn due to the S&P being up 9.2% so far this calendar year.

In essence, short vol trades are investors betting that the market will not fluctuate as frequently. These types of trades make money as long as the market trends upwards.

These types of funds or indexes are gashed when the market plummets in day to day action as it does from time to time. A good example of this was when the DOW lost a record 1,175 points in a single day last year, that week one index who sells short vols lost 6.5% in four days.

After the learning lessons last year, investors are being more conservative with their short vol trades. A fund called ProShares Short XIV Short-Term Futures ETF is one of the more popular ways to bet on the market volatility. The fund has been trending up this year but is still below the levels before the DOW drop last year.

These funds and indexes prices are completely determined by the market’s momentum and the way it's trending. If one believes the market is in an upswing short vols are a great tool to possibly achieve outsized gains.

However, just as the markets momentum drive these funds it can also be a killer. One scare in the market or a bad earnings week for companies and these short vol ETFs will dive headfirst. The decision to invest in short vols comes down to one’s outlook on the market in the future and a hope that nothing takes a turn for the worst.

As 2019 is upon us I see the popularity in short vols to increase as I see the economy next slowing down for the immediate future. The Federal Reserve has pulled back on its promise to tighten the economy by 50 billion a month. Other news has the markets trending upward.

If I had the choice to invest in short vols, I would not do so. Even if the markets look to be trending upward, I would not want an investment that is so dependent on market news in my portfolio. One scare in the market and the S&P drops 250 points in one week. Next thing you know my short vol position has shot down 20%.

The difference between short vols and companies are; short vols fall flat on their face and don’t have the ability to pick themselves up, companies fall flat on their face and have the ability to stand up and dust themselves off.

Sources:

https://www.wsj.com/articles/one-year-after-vix-blowup-investors-still-feel-sting-of-volatility-bets-11549371600?ns=prod/accounts-wsj