Posted on 02/05/2018 9:30:40 PM PST by BunnySlippers
An exchange-traded security which is supposed to be a bet on calm markets was collapsing after hours.
The VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) is down more than 80 percent in extended trading Monday. The security, issued by Credit Suisse, is supposed to give the opposite return of the Cboe Volatility index (VIX), the market's widely followed turbulence gauge.
The VIX doubled during regular market hours Monday, causing obvious havoc for a product seeking to track its inverse return. Though, the XIV dropped just 14 percent during regular trading.
But then after hours trading began and the security, popular with hedge funds betting on an ever-placid market, was off by 80 percent in extended trading.
The move after hours sparked fear among traders that violent declines in exchange-traded notes like this one would cause market volatility measures to spike further and weigh on the broader market.
[snip]
(Excerpt) Read more at cnbc.com ...
Does this mean that those responsible for the pullback are now projecting calm?
or
Was there something wrong with the VIX algorithm?
or
????
It was a side bet that lost.
The thing stockholders have to worry about at this time are margin calls. For example, one stock I follow will normally have a high volume day of about 400,000 shares traded. Today it was 4 million. This is almost certainly because a lot of people were hit with margin calls and had to sell. Tomorrow will probably have extra large volume as well. It takes about four really bad days to get all of the people out that were using margin heavily. Then volumes will go down to normal, and shares will have new owners with less leverage.
More than that, these things create arbitrage opportunity. This derivative type index appears to be based on the inverse of option price volatility. Options have 3 components to their price. Time, strike price and volatility. Volatility is a measure of speculation and interest in taking an option position. That’s why two different stocks XYZ put $30 June and ABC put $30 June giving all things equal, strike price, time value, and both stocks at the same price. One may have a volatility premium, meaning it’s volume is much higher than the other therefor has more active trading.
How they link the index to a price I’ve no clue. But it all sounds like to me people are hedging their bets and doing so robustly and with vigor.
I just hope this is not a long correction. I don’t want to think about it.
Today's action seems a bit like the climax of derivative index action in 2008 where the big banks and financial mastadons were caught in the downdraft--owing trillions on these index bets that they could never pay off.
Here's hoping today's market is just a mild mini-version of the Giant Correction and Uncle Sam will not be called on to cover losses incurred by the Big Boys.
ping
They keep letting them invent more bets and hedges when nobody understands all the intricacies. Owning anything like described is probably a hedge. So when the hedge side loses it should mean the hedged position gains. Except in cases where people were buying them to sheer speculation such as day traders and gambleholics.
They ought to do away with these complex derivatives altogether. They’re just a type of ponzi scheme where people who weren’t even participating get hurt because their bank or investment house took a large position on the losing side.
People will read all of the lies as to why the markets turned down sharply. It’s all lies. Here is a probable real reason: The Democrats pulled every string possible to manipulate our markets down for leverage in dealing with Trump on the budget deal coming up Feb. 8. Guess the pundits all conveniently forgot about that.
The key phrase is, "...the Fed had the market's back during the Obama administration.
No doubt about it.
The 10 Year U.S. Treasury Bond set an all time record low interest rate in July 2016, just four months before the election.
We have had three quarter point rate hikes since the record low, and the Fed announced three more expected rate hikes in 2018.
Billionaire liberal investors and hedgies, Soros included, want investors to blame PDJT.
They did just enough to trigger panic.
To believe otherwise is fool’s errand.
Stock futures markets are positive.
Nonsense. By ALL historical standards the U.S. stock market has been in overvalued territory for more than a year. The best market analysis had been WHEN a correction would occur, not if one would occur. Recent Fed and labor-wage signals added to the concerns about how overvalued stocks were.
Too many people trade on “expectations” and ignore fundamentals. They bid things up on “good news” that often only means a stock may be good to hold, where it is, but not so good it should be bid higher. Then, having been part of building a bubble in values they look for excuses and conspiracies to explain why stock prices went down.
VIX is a volatility index, irrespective of direction.
Yes, volatility is irrespective of which way the market is going. But volatility jumped along with last week’s big sell off and lots of investment funds and hedge funds had hedged bets against a jump in volatility. One VIX betting index lost 80%. Those who bet against higher volatility lost and some had to cover their losses. Some had to sell actual asset holdings to cover their hedges against a jump in volatility.
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