The best stock market trade of 2018 is a total reversal from last year
Reuters / Lucas Jackson
- As the US stock market has been mired in turmoil, one trade has stood head and shoulders above the rest - and it might not be what you think.
- The strength of the strategy is a complete reversal from 2017, when an inverse version of it was crowned Business Insider's trade of the year.
Nasdaq 100 erasing its year-to-date gain entirely on Monday - volatility-linked products have surged.
All three vehicles derive their price from the Cboe Volatility Index (VIX) and allow traders to either bet on or against an imminent rise in stock market price swings. And all three have returned far more than even the best-performing stocks in the benchmark S&P 500 this year. Even index-leading Nektar Therapeutics - up more than 65% - has been put to shame.
Perhaps even more remarkable than the outperformance of these VIX instruments is the complete 180-degree turn they've made since the start of the year.In late 2017, the so-called short-volatility strategy, which amounts to a wager on market placidity, was crowned as Business Insider's stock market trade of the year after surging more than 200%. Now, just three months later, the opposite bet is the one making loads of money for traders.And while an increase in the VIX means a decline in the S&P 500 roughly 80% of the time, there are likely many experts across Wall Street applauding the resurgence of the long-volatility trade. For months, people like Marko Kolanovic - who helms JPMorgan's global quantitative and derivatives strategy - called foul on the shorting of volatility, likening it to the conditions leading up to the 1987 stock market crash.
Overall, his argument echoed that of many Wall Streeters - which was that VIX products were being traded in reckless fashion as investors attempted to get rich quick. And that devil-may-care attitude caught up with them, when two short-volatility trades imploded in February amid market turmoil.
And while that reckoning ended up temporarily worsening a stock sell-off, some argue it was actually a long-term positive, because it wiped out a major pressure point for the market.So the next time you're at a loss for what stock market trade to make, take a long, hard look at the volatility complex. If you time it right and understand the proper mechanics of the VIX, there's some serious money to be made. Just make sure to get the direction right.
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