Carmika Partners Unpack the August Volatility Spike and Complexities of Options Trading

This episode explores the unusual volatility spike in the options market during early August 2024, specifically focusing on the impact on volatility traders. Against the backdrop of this event, Martin Vestergaard and Michael Cameron of Carmika Partners discuss their experience, revealing that their program, along with many others, suffered losses. More significantly, the discussion delves into the nature of the spike, with Vestergaard characterizing it as a VIX event rather than a true volatility spike, noting the delayed opening of the CBOE and the resulting illiquidity. For instance, one option printed a 500 vol in pre-market hours, despite the S&P being down only 4%. As the discussion pivoted to the underlying causes, the role of daily options and their impact on market dynamics was highlighted, leading to a broader conversation about market structure and the challenges of trading in an increasingly electronically driven environment. In contrast to traditional models, Carmika's strategy focuses on relative value trades using options, aiming to profit from mispricing and skew movements rather than directional bets. What this means for investors is the need for diversified portfolios incorporating strategies that can perform well under various market conditions, especially given the complexities and potential for unexpected events in the options market.