Archives for February 2018

If you didn't know what the Chicago Board of Options Exchange Volatility Index (VIX) is, you almost certainly do now after the correction.

Plenty of regular investors don't realize how the VIX works, though – what makes it move up, down, and sideways.

You can't trade the VIX directly – it's a mathematical calculation, after all. But a whole buffet of easy-to-trade, not-so-easy-to-understand exchange-traded products (ETPs) makes it possible for anyone – mom-and-pop retail investors, institutional traders, risk parity funds, and newly minted hedge funds – to bet on the VIX moving up, down, and sideways.

These folks saw the VIX doing a whole lot of nothing for more than a year and bet accordingly, to the tune of tens of billions of dollars.

And for a time… it was good (notice I didn't say "smart").

But earlier this month, when human and silicon investors and traders got spooked, the VIX spiked – spiked like never before, in fact – jamming an ugly, red-hot poker into that great big, happy, feel-good short volatility bubble.

All the investors and traders out there who spent a year or more picking up pennies in front of a double-decker bus got killed when their favorite ETPs blew up.

What happened after that… well, we're still dealing with it and could be for some time. The market's trying for a run higher from here. It's already pared about half its losses from the depths of the correction, but the road isn't as smooth as it was just four weeks ago.

Amazingly, the trade that started this whole mess is still out there. Sure, a few high-profile short volatility vehicles imploded, but it's still very possible for this to happen all over again.