Tail-Risk Hubris Goes All-In

by Rick Ackerman

Investment manias are nothing new on Wall Street, but this time the heavy betting is on the mania itself. Speculating on volatility is the latest fad, and it is metastasizing so quickly that in just two short months wagers that the stock market will grow even crazier have become the actual cause of its craziness. The bets mainly involve derivatives, including options and ETFs that are tied to trillions of dollars worth of stock. Big guys, little guys and everyone in-between are supposedly immersed in this tail-risk crapshoot, and it is causing markets to spasm wildly not for bullish or bearish reasons, but rather, as implied above, because of the volatility bets themselves.

Tail-risk mania’s fuse was lit in in January, when some canny institutional traders loaded up on then-cheap insurance against a market crash. This speculation proved to be timely, but it was more than just luck. They had access to good information that wasn’t available to most investors at the time.

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