The financial markets are currently driven by two dominant forces: bullish bullish trend leading to consistent historical peaks and volatility that is completely lacking.
The two current trends are in tandem. The VIX moves back to the S & P500. The "Fear Index" has remained at a 13-month low as the SPX records new highs.
Experts generally watching the options market are seeing alarming signs. While the stock markets set the perfect conditions for earnings in stock investing, positioning the stock market gives another picture of the situation.
Jim Carney, CEO of ParPlus Partners is particularly worried after selling weekly S & P500 options. The average daily volume of weekly options has reached record levels since 2007, according to CBOE data.
This strategy is implemented with the idea that markets will continue to rise in calm conditions. For example, the Warren Buffet fund, Berkshire Hathaway, sold options in the billions index from 2004 to 2008 that markets will continue to rise over the next 20 years.
But this strategy also has risks. It can implode when volatility rises sharply and markets plummet. The latest IPS Strategic Capital survey shows that options selling has not, in most cases, yielded any return to investors since 2018.
"Deals with such weekly options are overwhelmingly impressive - but that can turn out to be something explosive." says Carney. He added: "I don't know if this will happen in a month, three or 10 years. But at some point, things will explode because investors will lose all their money. It's just a matter of time."
Carney gives the comparison February 2018. Then the VIX Index made its strongest one-day upward movement. This unexpected and extreme rise in volatility wiped out nearly $ 3 billion in minutes. This also led to the deletion of the VelocityShares Daily Inverse VIX Short - Term index. Or XIV.
He also shares that his surviving known investors are trading weekly options but taking a huge risk.
"If we have a jump of 6% again and they fail to hedge, they will ruin a healthy one." - shares the fund manager. "And imagine an 11% jump ... each of them will go bankrupt and we will have the same situation as in February of last year."
However, Carney does not reveal exactly what deals he made to win from a similar scenario. It merely indicates that it is not short on volatility.
His fund, after all, focuses on volatility and wins when markets collapse in a moment of chaos.
And his unusual charge also draws attention to his views. 33% performance fee, but only if the fund beats the market.
Source: Business Insider Prime
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