Wall Street recently peddled investment tools that allowed retail investors to track the inverse performance of the VIX, an index that tracks market volatility.
Wall Street firms promised immense gains from these funds with manageable risk.
That all went up in smoke on Feb. 5, when the VIX more than doubled in the course of an hour and sent these inverse funds into free fall.
by Shah Gilani
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.
by Tim Melvin
It was a busy weekend here in Orlando recently.
The markets were going bananas – something about millions of insanely crowded, leveraged-to-the-gills bets against volatility blowing up like "Zabriskie Point" – but I wasn't sweating it too much.
My money was in good shape, still drawing unreasonably good returns from top-flight companies I own.
But The MoneyShow was in town, so I took a break from researching everything there is to know about these firms to spend parts of Thursday and Friday there.
Though, it must be said, I've gone every year since I moved to Orlando six years ago – for at least part of the day.
Here's the thing: I don't think I have attended five of the sessions in that time. You see, I've got little to no interest in most of the topics; I've tested – and rejected – most of their allegedly "foolproof" strategies years ago.
I go for three reasons.
First, I know many of the speakers, so I go to have lunch, dinner, or just a coffee to catch up with them.
Second, I go to restock my office supplies. Most of the exhibitors are giving away pens, notepads, and other useful stuff. Yes, I'm "that guy."
Last, and most important, I go to wander the exhibit areas and check out the hot topics of the day… and what horrific new ideas are being foisted on the investing public. I talk to folks and eavesdrop.
What I found this year was pretty upsetting, to be honest...
