VS -1X VIX Short Term

Market Correction

How Shorting the VIX Blew Up the Market, and Why It Could Again

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.

Here's how...

Market Correction

I Don't Think the Bull Market Is Going Anywhere

First things first: Don't panic. The raging, grinding bull markets are "officially" in correction territory.

It's a healthy thing.

Though I've been consistently bullish in my outlook over the past year or so, I've said that a 3% to 5% dip in the markets might be in order and that a correction like this would be welcome.

Why? It's not that I enjoy watching stocks fall… unless I'm planning to recommend that my readers play the "rubber band snap" (although I did, and they made a quick 50% gain). 

Rather, this downturn is good for the simple reason that we needed to see that capitulation.

Let me show you what I mean, and why this week's rough sledding has been a good thing, even in the very short term...