Teflon Don
I'm back baby
I know there is a lot of speculation about why the market has dropped so precipitously in the last few days (looks like a bounce back today)
I believe it is due to short covering for people who have been shorting volatility. For those of you who don't know what volatility is, google the VIX. Basically, it is a fear index and for the last year or more it has been crazy low. Many people have made a lot of money shorting volatility over the past year.
Up until 6 years ago, the only way to trade volatility was through options and the futures market which most unsophisticated investors don't know how to do. However, with the advent of the ETF, there was a new avenue to invest in volatility. If you wanted to long on volatility you could invest in UVXY and VXX and if you want to short volatility you could invest in SVXY and XIV. People who were long on UVXY over the past year have lost their asses and people who shorted volatility made a killing.
Well volatility came back with a vengeance the past three days and what we witnessed was a good ole fashioned short squeeze. Those who were shorting volatility particularly those who were doing it on a leveraged basis had to sell assets to cover their shorts (literally). That precipitated the fall. To give you an idea of how bad it really was, yesterday at the close of the bell, SVXY closed at $72.02 which was a 33% drop for the day. In after hours trading it went all the way down to $4. That's right. $4/share. So imagine if you backed the truck up and loaded up on 1000 shares of SVXY at $132/share only to see it drop to $4?
I suspect we will see some more choppy waters as this unwinds. I saw today that Credit Suisse is liquidating XIV. What is unfortunate is that many people who don't understand these instruments just lost a ton of money and it is very sad.
I have been playing the volatility market all year (mostly shorting), but I have only done it through swing trades and playing options. The great thing about options is you can manage your risk. If you buy 1 option with a price of $1.50, you can't lose more than $1500. Where as if you bought 100 shares of SVXY at $132 you could have lost it all and that is what happened to many people last night.
The moral of the story is this. Don't fool around with investment instruments that you don't understand.
I believe it is due to short covering for people who have been shorting volatility. For those of you who don't know what volatility is, google the VIX. Basically, it is a fear index and for the last year or more it has been crazy low. Many people have made a lot of money shorting volatility over the past year.
Up until 6 years ago, the only way to trade volatility was through options and the futures market which most unsophisticated investors don't know how to do. However, with the advent of the ETF, there was a new avenue to invest in volatility. If you wanted to long on volatility you could invest in UVXY and VXX and if you want to short volatility you could invest in SVXY and XIV. People who were long on UVXY over the past year have lost their asses and people who shorted volatility made a killing.
Well volatility came back with a vengeance the past three days and what we witnessed was a good ole fashioned short squeeze. Those who were shorting volatility particularly those who were doing it on a leveraged basis had to sell assets to cover their shorts (literally). That precipitated the fall. To give you an idea of how bad it really was, yesterday at the close of the bell, SVXY closed at $72.02 which was a 33% drop for the day. In after hours trading it went all the way down to $4. That's right. $4/share. So imagine if you backed the truck up and loaded up on 1000 shares of SVXY at $132/share only to see it drop to $4?
I suspect we will see some more choppy waters as this unwinds. I saw today that Credit Suisse is liquidating XIV. What is unfortunate is that many people who don't understand these instruments just lost a ton of money and it is very sad.
I have been playing the volatility market all year (mostly shorting), but I have only done it through swing trades and playing options. The great thing about options is you can manage your risk. If you buy 1 option with a price of $1.50, you can't lose more than $1500. Where as if you bought 100 shares of SVXY at $132 you could have lost it all and that is what happened to many people last night.
The moral of the story is this. Don't fool around with investment instruments that you don't understand.