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Interactive Brokers CEO Peterffy says the 'short volatility' trade is akin to what caused the '87 crash

  • Interactive Brokers founder Thomas Peterffy shares his market views Tuesday on CNBC's "Squawk on the Street."
  • "This situation is very akin to the '87 crash which was caused by portfolio insurance, which [was] basically also people being short volatility. When people are short volatility, eventually they have to cover," he said.
Interactive Brokers Group, Inc. Chairman and CEO Thomas Peterffy.
Mike Segar | Reuters
Interactive Brokers Group, Inc. Chairman and CEO Thomas Peterffy.

Interactive Brokers founder Thomas Peterffy predicts more market volatility is ahead and compared the reason for this sudden sell-off to the driver behind the 1987 crash.

He explained why volatility surged during recent trading sessions.

"Over the last five years we had the most consistently profitable strategy was to sell above market calls and sell below market puts," the so-called bets against volatility he said Tuesday on CNBC's "Squawk on the Street." "It was like a rubber band, it suddenly had to explode. And that's what happened in the last few days."

Peterffy predicted the market will gyrate more as traders unwind their bets.

"It is going to, I think, stop … when most of these short options positions are covered by the brokers. It is going to be very painful. There will be lots of margin losses," he said. "This market is going to move up and down very, very nervously. And market makers who have suffered for a long time are going to make a great deal of money next few months or days."

The brokerage firm executive compared the current market to what happened during the crash in 1987.

"This situation is very akin to the '87 crash which was caused by portfolio insurance, which [was] basically also people being short volatility. When people are short volatility, eventually they have to cover," he said.

Peterffy is chairman and CEO of securities firm Interactive Brokers. The company is headquartered in Greenwich, Connecticut, and has more than 1,200 employees.