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Spike in volatility comes as Dow average tumbles 1,175 points
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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.See also Aha! "'The Vol Market Finally Broke': A Quant Explains What Happened Today, And What Is Coming Tomorrow" for a couple links if interested.
It’s short volatility, a bet against equity turbulence that traders have been piling into for years, lifting assets in related exchange-traded products to more than $3 billion, a record. Estimates of how much money is tied up in the tactic overall vary but one estimate from Chris Cole of the Artemis Capital Advisers hedge fund puts the total at more than $2 trillion.
That bet just got hit, hard. The Cboe Volatility Index jumped to 38.8 on Monday, its highest level since August 2015, prompting many betting against the measure to run for the exits and try to cover their trades.
In the scramble that followed, the S&P 500 index -- both a direct and indirect hedge for volatility trades -- plunged. At least two VIX-related ETPs stopped trading for five minutes or more as volumes soared. And funds that went short continued to tumble in late trading with the VelocityShares Daily Inverse VIX Short-Term ETN down 84 percent from the close and the ProShares Short VIX Short-Term Futures ETF slumping 79 percent.
Those products “have effectively been wiped out," Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, wrote in a note. Still, “the short vol products have covered 95 percent of their risk, meaning that the ‘VIX blowup’ event has effectively already happened. If the upward pressure on VIX (and to a lesser extent, downward pressure on S&P futures) was driven mostly by the VIX ETPs, that source of pressure is gone," he wrote....MORE
