InsideArbitrage August 2024 Mid-Month Update – Volatility and Howard Hughes

The Mean Reversion Volatility Trade

The extreme volatility we saw at the beginning of last week thanks to the impact of a small increase in Japanese interest rates on the yen carry trade, subsided very rapidly because of central bank intervention. Unfortunately this meant that there wasn’t much time to put on a volatility trade that I like to execute during times of extreme market distress.

The trade involves buying out-of-the-money long dated put options on the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX). There are two factors at play in such a trade including the fact that big spikes in volatility almost always tend to revert quickly. We saw this in 2008, we saw it in March 2020 and then once again last week.

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