Volatility Selling Is Back as Ex-Harvest Traders Join Fray

An options-powered strategy betting on calmer markets is roaring back as the Cboe Volatility Index, known as Wall Street’s fear gauge, recovers from pandemic-spurred gyrations.

Two former executives of $3.5 billion Harvest Volatility Management are starting investment firm Carrick Lane, which will initially focus on selling equity derivatives for income, according to a press statement.

The announcement comes just months after another Harvest alum, Dennis Davitt, started his own firm backed by billionaire Bitcoin investor Mike Novogratz to offer volatility strategies with the goal of amassing $1 billion within a year. ETF provider Simplify Asset Management filed just last month to list an exchange-traded fund that shorts VIX futures.

It all signals the return of betting on tranquil markets after the VIX spiked to a record last March -- sparking blowups for the riskiest versions of the trade.

Volatility Selling Is Back as Ex-Harvest Traders Join Fray

Led by Allan Kennedy and Ken Kwalik, Carrick Lane will pursue put-writing strategies to take advantage of the volatility-risk premium. That’s the tendency of options sellers to demand higher compensation for future uncertainty compared with what actually comes to pass.

“History has shown that after major spikes in volatility, the risk premium can stay elevated for subsequent years (not just months),” managing partner Kennedy said in an email.

The firm will target high net-worth individuals and institutional clients, and will initially package its strategies in separately managed accounts. Kwalik will stay on at Harvest for an interim period while also with Carrick Lane.

Covid Crash

Put writing is a more conservative version of the short-volatility bets that felled hedge funds like Malachite Capital Management in March 2020. Investors typically sell a put on a stock or index while at the same time investing in a risk-free asset like Treasuries. If stocks stay steady or rise, the investor keeps the premium received and the options expire worthless.

The risk is that equities fall and the option is exercised, compelling the seller to purchase the shares at the strike price.

That contrasts with the short-volatility trades pursued by the likes of Malachite, which used over-the-counter derivatives and leverage that ultimately led to its liquidation in the unprecedented market rout.

Such strategies went into abeyance post-Covid as risk appetite fell. The lack of options selling is arguably one reason the VIX remained mostly above the psychological 20 level for nearly a year after the crash. Last week, the gauge closed as low as 18, down from its record closing high of 82 last March. It was trading at 21 as of 10:36 a.m. in New York.

A generic version of the investing style on the S&P 500 has returned 5.7% this year after adding 2.1% in 2020, according to a Cboe index.

“We fully appreciate the short run importance of risk-managing through moments of heightened (often extreme) realized volatility,” Kennedy said. “It’s equally important to provide a pathway to exploit the opportunity that heightened implied volatility provides on the back of such a move.”

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