Summary
Comment
Short volatility strategies have thus far gotten off the hook after another period of high (negative) correlation to U.S. Treasury volatility. The chart below shows the correlation between the S&P 500 Put Writing Index and mutual funds employing the shorting of volatility to U.S. Treasury volatility (MOVE Index).
Bouts of U.S. Treasury volatility tend to occur during rapid ascents in yield. Drawdowns by these short volatility strategies tend to occur when risks between equity and bond markets become aligned. But, not this time (so far)! Recent turmoil across technology stocks have also had little impact on these strategies.
Concern of contagion is lacking with implied volatility across major asset classes near post-crisis lows. The chart below makes use of the CBOE’s indices of implied volatility (using options) for major ETFs. The average across available risk asset series is highlighted in dark gray.
The recent shedding of technology by investors may very well be a good old fashioned rotation instead of ‘risk-off’ reaction.