Danny Och's Massive Volatility Bet

Somebody was fading the complacency…

Have you heard about this one yet?

From Bloomberg:

Daniel Och’s hedge-fund group bought options on almost $12 billion of U.S. stocks during the first quarter, a move that may generate profits if markets turn more volatile this year.

The strategy, disclosed in a May regulatory filing by New York-based Och-Ziff Capital Management Group LLC (OZM), included an $8.8 billion option bet on companies in the Standard & Poor’s 100 Index. The firm bought both bearish put options and bullish calls on most of the members, including Exxon Mobil Corp. ($XOM), American Express Co. ($AXP) and General Electric Co. ($GE)

Och, a former risk arbitrager at Goldman Sachs Group Inc., hasn’t previously disclosed the widespread use of options since his firm began reporting holdings electronically in 1999. With the S&P 500 little changed this year, options have become an inexpensive way for managers wagering that markets will become more turbulent, said Christopher Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago.

“The only reason you would want to do this is if you were massively concerned about the markets on the whole and expected volatility to rise,” Rich said in an interview. “Going from zero to this is very, very significant.”

Why should you care?

Firstly, Och is in the pantheon, without a doubt, one of the best to ever do it.  His fund has shown annual returns of 14% since inception in the mid-90’s, with a third of the market’s volatility.

Second, volatility was almost buried alive like Uma Thurman in Kill Bill.  The Vix was headed toward single digits in all our minds by late April, we had the pine box ready and everything.  So to some extent this is like a mean reversion bet.

Third, it’s right about that time, volatility-wise.  Remember the Summer of 2010?  I do, it sucked for stocks and didn’t improve until Labor Day and the reign of QE2.  No such luck at the end of this summer on the QE score, politically it might be impossible.

I’m sitting straight up right now, eyes wide open.


Och-Ziff May Profit From Market Turbulence With $12 Billion Options Bet (Bloomberg)

UPDATED: My friend Jared from Condor Options isn’t so sure that is purely a vol bet, his comments at FT Alphaville here.

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