Nomura Says ‘50 Cent’ Has Banks Scrambling for VIX Hedges

LAGOS (Capital Markets in Africa) – The re-emergence of a huge U.S. equity volatility buyer has banks scrambling to hedge the other side of the trades and is even affecting levels on the Cboe Volatility Index, according to Nomura Securities International.

In July, a big purchaser accumulated protection against a major sell-off in U.S. stocks over the next month on the so-called VIX, in activity similar to that of the volatility buyer known as “50 Cent” given a penchant for hedging at that level in large amounts. And there’s someone on the other side of all those purchases.

Dealers are short a series of VIX calls, especially those with strike prices in the 20 to 24 range, “in massive size due to the ‘50 Cent’ entity’s massive hedging program flows,” Nomura strategist Charlie McElligott wrote via email on Wednesday. “This fund’s return to the VIX options market has the Street beyond capacity because as dealers get short this VIX upside, they have to go out and buy all sorts of crash protection due to their synthetic position.”

The VIX closed up 26% at 22.10 on Wednesday, while VIX volatility (VVIX) rose 12%, the most since May. Six of the VIX’s last eight sessions have seen double-digit percentage moves as markets are whipsawed by U.S.-China trade developments and geopolitical tensions. Skew, the cost of bearish options compared with bullish ones, has gotten expensive and forced investors to look hard for cheap protection. And the MOVE Index, which measures prices swings in Treasuries, is the highest since 2016.

 “VIX, volatility of volatility (VVIX) and skew have been saying over course of July that we were either going to crash up or crash down,” McElligott wrote. “So clearly all this short gamma for dealers in the VIX complex means chase-y moves in either direction, especially with the rates volatility spasm.”

Source: Bloomberg Business News