Speaking about one of my favorite subjects, VIX macro cycles, Davitt predicts that the key factor in the next few years will be the influx of money from 130/30 funds that will create significant new demand for options products:
“In the past, when the market made new highs, the VIX trended lower. Today, the S&P 500 is up 6.5% on the year and the VIX is up 80%, and the newest user hasn't even shown up to the party yet. That user is the 130/30 money (a type of leveraged long-short investment strategy), which now stands at $100 billion and is projected to grow to $1.5 to $2 trillion over the next three years. With these new entrants using derivatives to hedge their portfolios, option-buying is sure to take a jump.”
Adam’s commentary on the subject closely approximates my own thinking (I’m glad he gets up three hours earlier to figure all this options and volatility stuff for me…):
“I think an underlying theme of all this is that different eras have different characteristics, and it's important to look at volatility within it's own context. In other words, a 15 VIX was actually fat a couple years ago, the market itself had trouble trading at double digit volatility. Today 15 might be as low as it gets.”
Not only do I agree with Adam here, but I think it is important to note that if the projections about new 130/30 money are on target, this could be one of the biggest stories of the next few years.