In the midst of the artificial intelligence craze dominating Wall Street, a more subdued yet intriguing trend is gaining attention. While tech giants like Nvidia drive benchmark stock indexes to record highs, a less-publicized movement is unfolding within the US market. Investors are channeling substantial funds into strategies dependent on sustained equity stability, known as short-volatility bets. These strategies, now predominantly in the form of ETFs selling options on stocks or indexes to enhance returns, have seen their assets surge nearly fourfold in the past two years, reaching a record $64 billion, according to data from Global X ETFs. This resurgence comes after the infamous short-volatility bets played a significant role in the stock market plunge of early 2018.
Despite the potential for reliable profits if the market remains calm, concerns are emerging as these short-volatility positions accumulate assets. With major event risks on the horizon, such as the US presidential election, investors are becoming apprehensive about the impact of the short-volatility trade. While the new ETFs structurally differ from their 2018 counterparts, utilizing options on top of a long stock position, the sheer size of the positions and their suspected role in suppressing stock volatility raise questions about the potential for a feedback loop that could lead to unforeseen market dynamics. This growth in short-volatility strategies is part of a broader expansion in derivatives, introducing additional unpredictability to the market. Analysts and fund managers are closely monitoring the situation, aware of the delicate balance that exists within these strategies and their potential implications for market stability.