John Mauldin Growth, macro, healthcare Thoughts from the Frontline (10,226 followers) Summary Did you know that there have been 39 times since 1990 when the VIX has closed below 10, and that 30 of those times have happened this year? And 15 of those have been in the last 30 days! A 2% or 3% move down in the markets could cause short covering in the VIX that could quickly spiral out of control. Did you know that there have been 39 times since 1990 when the VIX has closed below 10, and that 30 of those times have happened this year? And 15 of those have been in the last 30 days! Ed Easterling of Crestmont Research sent me recently an updated chart of the VIX Index. Notice that the all-time low of 9.19 was put in on October 5, 2017. All the previous sub-10 closes occurred in only two periods: Four of them were in the winter of 1993–1994 (around Christmas, which is traditionally a light trading period), and the others were in the winter of 2006–2007, another period of great complacency. You can’t really draw any conclusions about the next move of the markets (I’ve written a lot about the unpredictability of the market in my free weekly newsletter, Thoughts from the Fronline, lately), because the VIX could spike to 50 or stay in this low range for a very long time. There’s Massive Short Position in VIX Essentially, we have trained investors to “buy the dips,” and that mentality removes a lot of volatility. Here is a chart of the VIX since the beginning of the year (from Yahoo Finance): I got a blitz email tutorial this week from my friend Doug Kass (of Seabreeze Capital), a writer for the Street.com and Real Money Pro. He generally puts out two to three short pieces a day with his observations on the markets, and he discusses what stocks he is trading. I was particularly struck with his observation about the massive—and it truly ismassive—short position in the VIX and VIX futures. Look at this chart: Now, as my friend and fellow Mauldin Economics writer Jared Dillian notes, prior to 2006, it was not possible for retail investors to trade the VIX, so an ETF was created and options and futures became available. Prior to that time it was just professionals who could create the effect of the VIX with futures and options trade positioning on the S&P. You almost had to be a pit trader to be able to do it. A 2-3% Correction in the Markets Is All That It Takes Understand, the VIX is a totally artificial construct. It’s a way to measure the future expectations of investors regarding the volatility of market prices. And lately, investors have been rewarded for shorting the VIX. It is almost like the experiments you see where rats learn that if they punch a button, they get a grape. Investors have learned that if they short the VIX, they make a profit. Except that now there are so many people on that side of the boat that when the boat starts to turn over, the rush to get the other side is going to rock that boat hard… possibly to the point of swamping it. Doug warns that a 2% or 3% move down in the markets could cause short covering in the VIX that could quickly spiral out of control. Not unlike the “portfolio protection” trade that brought about the 1987 crash. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
I doubt the big boys are shorting the VIX massively. The big boys are probably looking for reversal to the mean or beyond. I am waiting patiently to long the VIX with huge volume. I have no intention to short it. Now there is no signal to long it. So I just wait. Who knows, this time, it might shot up to beyond 80 level. The last time it went up that high was in 2009. So it is about time VIX index / futures shot up. This type of opportunitely happens few times in our life time. So we better don't miss such opportunity. Anyway, this is good article.
Sigh, more newsprint and pixels wasted on misunderstanding the VIX landscape. There is no "massive short position in VIX". That 'fact' has been discredited by a number of individuals and IBs in recent weeks (this paper, for example). And the Federal Reserve published results earlier this month of its regular opinion survey which (showing their concern, perhaps) had added questions on client volatility positioning, answered by a cross-section of financial institutions and dealers/intermediaries. Generalising, the majority of their clients - including hedge funds - were positioned net long. CBOE's Russell Rhoads in his blog post Some Perspective on High VIX Non-Commercial Short Interest examines the evidence and finds it less than dramatic. For the believers in the 'crowded trade/massive shorts' argument, how do you square this with the continuing availability of a volatility risk premium of a few percentage points between IV (VIX) and the subsequent realised vol of the S&P500? As Valentine observes in his paper, this would likely have been eroded or even turned negative. But don't let facts get in the way of a good story. P.S. There's merit in Kass' claim that a relatively sizeable correction in the SPX could cause dislocations and significant moves in VIX instruments. But the culprit won't be a short squeeze.
agree with you. When the big boys shorted VIX, they shorted with huge volume. When price drops, they reduce their position. Once it hits the floor, their position would be virtually zero. But small boys might do the reverse. They continue to short even when price breaks the floor.
I wouldn't be surprised to see the VIX breach even lower, early longs capitulate, maybe some talk of "low vol is the new normal" etc. Then everyone piles on even more short to get blown out on the real move (whenever that is).
I have no opinion on if traders should be shorting VIX symbols. I do believe that short VIX options, VX futures and symbols like VXX seems to be a very crowded trade, as it has been overall easy money for most of the year. It is the strategy that many have focused on.
For every seller of a future there is a buyer. Besides why is everyone so terrified of 175K short futures contracts ? Thats $175M per vix point. Whats the big deal ? a 10 point move = $1.7B. US market is worth $16T. VIX futures cannot move SPX, it does not work this way. Much more people will get hurt if tsla falls or amzn. I see much bigger danger of concentration of capital in biggest tech stocks. If apple falls 10% it will wipe out $80B and will pull indeces with it and we have plenty of companies like that. Besides being long appl has been an overcrowded trade for past 10 years, its not really an argument that you have to exit the trade simply because a lot of people are in it.
Bob, what facts and evidence can you call in support of your belief that would contradict or refute some of the sources I referenced? How do you explain the persistence of the VRP? Since we're talking about contracts and products using an exchange-traded derivative, VIX futures, why not call the long side crowded? I'd agree with anyone that shorting index volatility via VIX instruments is a lousy risk-reward proposition now. But surely VIX is low because S&P realised vol is low (which informs the IV of SPX options except where an event is being priced into the term structure, but of course you know this!) not because it's a crowded trade, n'est ce pas?
I did not follow your question. Are you asking me why I think shorting these products is a crowed trade? You want evidence?