If financial market participants acted more like that famous Honey Badger, fewer investors might be suffering from seller’s remorse on Friday. The cobra-scoffing, honeycomb-raiding Honey Badger, famous for snacking no matter whether its prey bites, injects venom or stings the heck out of its attacker, just eats what it wants, when it wants, and pays little attention to the risk. The day’s 17% decline in the CBOE Volatility Index (VIX), currently at 12.11, appears to be a victory for couldn’t-give-a damn-what-you throw-at-me risk managers who react less to spikes in option premiums resulting from the latest geopolitical event.
At 23.7 million contracts, option volumes surged Thursday to the highest since April 24 as traders scrambled for portfolio protection. Others reacted to the near 40% volatility jolt by adjusting their efforts to take in premium.
Owners of short calls before the news, naturally not sensing the heat that was about to arrive, had rolled forward and further away from the money in what had looked like a strong market. The cost of doing so would have been averted had they seen the market plunge coming. Sellers of put spreads ahead of the news were forced to dance around the surge in volatility, leaving option traders of all varieties questioning their approach on Friday as conditions normalize.
The Friday rebound for stock prices and drop back down to earth for volatility has left some investors regretting their earlier response, forcing them in some cases to react in exactly the opposite manner to their number-one wish – a setback for stocks and a leap in volatility. Wise investors might take a leaf out of the Honey Badger’s book and just not give a damn!
Chart – CBOE VIX spike duped professional