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Short Volatility: Is There Still Meat on the Bone?



January 10, 2018

If you don’t believe that things are in feel-good mode around the investment world, check out the run of consecutive positive months for the MSCI World Index. As the chart below illustrates, that index had 13 consecutive positive months up to the end of November, 2017. That kind of action tends to dampen option pricing and reduce actual measures of market volatility to almost nothing. Remember, volatility is discernable from a ‘pivot’ of movement, meaning up and down.

‘Up’ day-after-day is a little misleading because it doesn’t measure significant movement even though we all know that movement has occurred to the upside. So has 2017 really been devoid of volatility? Perhaps per se, but we can clearly see from world index performance data that it has been a year full of sharp movement – albeit just upside movement. That’s part of the reason why a number of inverse short-term VIX futures products have performed exceptionally well. They capture short volatility in a pure fashion, meaning without strike risk.

Things have worked out about as well as possible for these products, but I believe it’s time to consider trimming positions – there may not be much meat left on the bone here. A more elevated and normalized volatility environment, and potential sharp volatility short-squeezes could be on the docket for 2018.

Consecutive, record-breaking months of positive returns in the MSCI World Index


Source: SG Cross Asset Research, 1970 to November, 2017.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

Certain statements may constitute a forward looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

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