Short volatility Waterloo; Hedging activity pop; VIX ETPs in all their glory

Feb 6, 2018

Observations & Insight

Vol-cano Erupts – How’s Seth Golden Doing?
Spencer Doar – JLN

Last year there were a few stories that came across the desk regarding the juniorization of firms and how removing experienced senior personnel could present risks of its own. After all, if you came into the markets in the 2010s, how would you have experience with crazy drawdowns? (Myself included.) Maybe some are ahead of the curve and have at least seen Trading Places.

Well, a lot of staff just gained some experience.

The options and volatility stories of the day are intertwined and generally fall into the following storyline in some way:

1) Markets finally welcomed volatility back on Monday (ensuing whipsaws have been fun, too), which led to
2) the short volatility trade unwinding. That
3) impacted volatility-linked ETPs leading to
4) trading halts and concerns about those volatility notes and funds and their managers/issuers/providers. Due to this overall rout, of which this was just one part,
5) trading is/was brisk which means, finally, liquidity providers are smiling.

There’s a lot of what feels like surprise surrounding the aforementioned ETPs when none of this is news per se. It’s not like there weren’t prospectuses available to read. Plenty of others have wondered aloud how much people understand what could happen to their darling-of-the-moment trading vehicles.

Short volatility concerns are not new. Just one example comes from Artemis Capital’s outlook Volatility and the Allegory of the Prisoner’s Dilemma back in 2015: “The great unknown is that this massive short volatility animal that appears tame given a regular diet of central bank liquidity may turn wild when that liquidity is removed. The wrong ‘risk- off’ event may expose a hidden liquidity gap in the short VIX complex that could unleash a monster.”

Just a few weeks ago Carmot Capital and Incline Investment Management noted something similar (link to PDF) – “The central banks have already herded investors into a narrow canyon of short volatility strategies. By suppressing volatility, the Central Banks made investors all feel like Nobel laureates by making explicit (short VIX, option writing) and implicit (risk parity) short volatility strategies excellent yield generators. Too bad these investors are now running LTCM clones—generating a positive yield while things are normal, and an extreme downside when they aren’t.”

Riding the elevator up to the office this morning netted a conversation about the whereabouts and mental state of that infamous former Target logistics manager who day trades VIX products. It was last August when the NY Times put out the article – Day Trading in Wall Street’s Complex ‘Fear Gauge’ Proliferates – that mentions him. That example clearly struck a chord, and the elevator ride was not the first time Mr. Seth Golden has gotten a mention in the time since the story came out. Of course, if you’re a Patriots fan AND had a large short volatility position, you probably have it worse than Seth.

But wait, there’s more! VIX Sellers Wait Out the Storm to Drive Volatility Lower Again

Lead Stories

VIX at 38 Is Waterloo for the Beloved Short Volatility Trade
Rachel Evans and Elena Popina – Bloomberg
Spike in volatility comes as Dow average tumbles 1,175 points; Years of market calm shattered by rising inflation concern
Of all the harrowing things seen in the stock market Monday, one was a special nightmare for investors in what has become one of the stock market’s favorite strategies.

****SD: If VIX at 38 was Waterloo, then this morning’s action probably felt like the Charge of the Light Brigade – or maybe the Battle of Cannae is a more fitting analogy, given it made the Roman Empire completely reevaluate its fighting tactics. More stories: Financial Times – Shorting volatility: its role in the stocks sell-off; CNBC – Wall Street’s relearns a lesson as a favorite trade blows up; MarketWatch – ‘Short-volatility Armageddon’ craters a pair of Wall Street’s most popular trades, could roil market; Barron’s – Leverage Gets Shaken Out in Rout; Bets on Wall Street tranquillity crushed by volatility surge; and Business Insider One word keeps popping up in Wall Street notes – Gamma

Volatility pop boosts U.S. options hedging activity
Saqib Iqbal Ahmed – Reuters
U.S. equity options traders bought contracts to protect against declining stock prices, driven by the biggest surge in volatility in months, but trading activity on Monday suggested traders are not necessarily hitting the panic button just yet.

More Than a Dozen Volatility-Pegged Products Have Been Halted
Luke Kawa and Rachel Evans – Bloomberg
Wild swings in volatility are wreaking havoc with exchange-traded products tied to the Cboe Volatility Index. A day after doubling in the biggest run-up in its history, the VIX swung from 50 and back to 25, triggering price volatility halts in a number of ETFs and ETNs linked to the gauge as the market awaits further news.

An Inventor of the VIX: ‘I Don’t Know Why These Products Exist’
Max Abelson and Joe Weisenthal – Bloomberg
Fifteen years ago, Devesh Shah was still in his 20s when he helped invent the stock market’s current barometer of fear.
It was a new version of the Cboe Volatility Index, a gauge of expected price swings for the S&P 500 Index. The VIX, as it’s known, has become the talk of Wall Street after Monday’s record surge, sending many products tied to it into disarray.

****SD: Despite all of what I said above, and despite the retail investors on the web posting screenshots of their terrible volatility losses, there are institutions deploying these products. ProShares’ roadshow regarding VIX ETPs at the Cboe last year made that clear.

Credit Suisse Says It Saw No Losses From VIX-Linked Securities
Jan-Henrik Foerster – Bloomberg
Credit Suisse Group AG, the Swiss bank scaling down its trading unit, said it hasn’t suffered any trading losses related to exchanged-traded notes with which holders made bets on muted market swings.

****SD: CNBC – Credit Suisse says it will end trading in the volatility security that’s become the focus of this sell-off; CNBC – Obscure security linked to stock volatility plummets 80% after hours, sparking worries of bigger market effect; Bloomberg – BlackRock Urges More Regulation After Inverse Notes Collapse; and a related Reuters story pertaining to different ETN – Nomura to redeem volatility-short ETN as markets tumble.

Market volatility spurs some funds to look again at currency hedging
Simon Jessop, Saikat Chatterjee – Reuters
A pick up in currency market volatility over the last few days after years of suppression by central banks’ easy-money policies has prompted some investors to look again at protecting against, or profiting from, sharp moves.

****SD: Also see a story timestamped midday yesterday from Bloomberg – FX Hedges May Not Stay Cheap

High-speed trading firms have been hoping for market chaos just like this
Frank Chaparro – Business Insider
The world’s fastest traders must be loving this. The Dow Jones Industrial Average witnessed its largest point decline in over six years on Monday, while the VIX – an index that gauges market anxiety – soared to its highest level since 2015, doubling in the span of a few hours.

Volatility-Targeting Funds Could Sell $225 Billion of Stocks
Sid Verma – Bloomberg
The turmoil in global equities has spurred a wave of deleveraging among volatility-targeting funds that’s set to unleash $225 billion of equity sales in the coming days, according to Barclays Plc.

****SD: From MarketWatch – Stock market could see another $100 billion in outflows after volatility surge: JPMorgan’s Kolanovic

VIX: The ‘fear index’ has only been this high on 3 prior occasions
Jim Edwards – Business Insider
As stock markets around the world continue into their third day of plunges, the VIX has only been this high on three prior occasions.
The Cboe’s Volatility Index, which measures investors’ expectations of future stock price fluctuations and is commonly referred to as the “fear index,” usually spikes during stock market crashes. Traders can bet on VIX spikes in order to offset their losses from stock declines.

Exchanges and Clearing

Worries About VIX Funds Push Cboe’s Shares Down by Record 17%
Annie Massa and Brian Louis – Bloomberg
Cboe Global Markets Inc. shares suffered a record plunge as this week’s market rout roiled volatility products whose underlying trade on its exchanges.
Credit Suisse Group AG announced it’s liquidating a VIX fund because of how much the volatility index spiked Monday. Similar funds were halted, with one explaining that an “unexpected level of volatility has impaired the trading of the underlying derivatives used by many VIX-related exchange-traded products.”

*****SD: Barron’s – Why Higher Volatility Is Hurting CBOE When It Should Be Helping

Cboe Global Markets Reports January 2018 Trading Volume
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today reported January monthly trading volume and average revenue per contract (RPC)/net revenue capture data at

Paul Milgrom to Receive CME Group-MSRI Prize in Innovative Quantitative Applications
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, and the Mathematical Sciences Research Institute (MSRI) announced Paul Milgrom, Shirley and Leonard Ely Professor of Humanities and Sciences in the Department of Economics at Stanford University, as the 2017 recipient of the CME Group-MSRI Prize in Innovative Quantitative Applications. A ceremony honoring Milgrom will take place at CME Group headquarters on Monday, Feb. 12, at 9:30 a.m. CT and will feature a dynamic discussion on the topic of leading research on financial market design.

Intercontinental Exchange Announces Record Trading of NYSE FANG+ Index Futures Contract for Two Consecutive Days
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced a record trading week for the NYSE FANG+TM Index futures contract. With average daily volume of 3,278 contracts last week and record daily volume on Friday, February 2, of 7,884 contracts, last week saw record volumes for the new contract over two consecutive days amid increased market volatility.


Exchange Data International Introduces New Service: Option Analytics
Exchange Data International (EDI) is pleased to announce the launch of its new service: Option Analytics.

Anova Technologies Launches New Network Bridging Nation’s Largest Exchanges
Jeff Patterson – Finance Magnates
Anova Technologies has unveiled a new long haul wireless network, linking up with Equinix campus of NY2/NY4/NY5 in Secaucus, New Jersey. The network connects with Aurora, IL, which in the process serves some of the country’s leading electronic trading venues.

Fidelity investments says homepage is down, working to fix problem
Fidelity Investments said on Tuesday that its homepage was down and that it was working to fix the problem.

****SD: Oh, you want to trade, do you? Want some advice? Tough. Also see Betterment and Wealthfront websites crash during market bloodbath.


Tax Benefits of Options and Other Derivatives
The Ticker Tape
You have alternatives when it comes to tax planning. Targeted investing might trim that bill from Uncle Sam, or at least help you time when you’ll pay.

Trading European Volatility with VSTOXX Futures and Options from the US
Eurex Exchange
In this webinar, we will detail the construction of the European VSTOXX volatility index and the similarities and differences from the VIX, the growth of VSTOXX futures and options and utilizing VSTOXX derivatives for directional trading and spreading. We will also touch on the newly listed VSTOXX Options on Futures, which are now available for US traders and investors since February 2017.

****SD: What timing for this webinar.

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