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A stock chart is displayed on a terminal as traders work on the floor of the New York Stock Exchange.
“During this period of low volatility, shorting volatility has become incredibly profitable,” Lafferty explained. Shorting refers to a trading technique where investors bet that an asset or security will fall in price.
“To the casual observer this may seem odd: Shorting an investment profitably requires borrowing and selling the asset now while later repurchasing it at a lower price (and pocketing the difference). But volatility hasn’t been falling. It fell dramatically after the Great Financial Crisis and, with some sporadic exceptions, has remained mired below 15 in the past several months – and more recently below 10.”
In July, Boris Schlossberg of BK Asset Management, told CNBC that betting on unusual volatility could be “the most dangerous trade.” He referred to the XIV exchange-traded note, a product designed to deliver the inverse performance of the VIX index.
This could be “the most dangerous trade in the world,” according to the macro strategist. “It’s already had a massive run up because we’ve had very low volatility,” but at this point, “it’s very likely that volatility is going to increase,” Schlossberg told CNBC’s Trading Nation.
Flows into the XIV have surged as much as 100 percent since the start of this year.