Can We Really See a Short Squeeze in VIX?
The volatility index isn't something that I mess around with very often. In fact, even during 2008 when the negative correlations between VIX and stocks were near perfect, buying volaitlity still wasn't my trade of choice. I was much more likely then to just short Financials. Today, I still don't ever buy VIX as a hedge or as a directional play. But there's something interesting going on that I think is worth mentioning.
First of all, traders that have bought a derivative or an ETF on the VIX have mostly been losing money for years. We all know this, it isn't a secret. The $VXX ETF itself has been nicknamed the widow-maker by some of the circles around new york city. So there's that kid touching a hot stove sort of mentality, "It's burned me one too many times". This anger is a nice backdrop for a potential long position.
So why am I bringing up something that I rarely ever talk about? Well, the last time that investors had this many short positions in VIX futures was just before the volatility index rallied 34% on Feb 25th. This was the biggest rally the index had seen since the summer sell-offs of 2011. Last month, short positions initiated by hedge funds reached all-time highs according to CFTC data.
“This year’s rally in U.S. stocks has led to a 19 percent
plunge in the VIX, creating profitable strategies to bet against
volatility futures. A decline in equities and subsequent
increase in share-price swings would bring losses for VIX short
sellers, which may drive them to cover the trades, according to
Ramon Verastegui of Societe Generale. Increased demand for the
contracts will push volatility higher and may exacerbate the
stock-market selloff, he said.The concentrated short in the VIX futures is like a red
point if you look at a map of the market, signaling potential
risk,” Verastegui, head of engineering and strategy at the
French bank, said in a Sept. 13 interview from New York. “A
short squeeze in the VIX will have an impact on the volatility
market and that can spill over into other markets, accelerating
a move down in the S&P 500.”
Looking at this chart, I don't really see much of a reason to get really long volaitlity here. It's just not the way I would position the portfolio. But I think it's important to recognize the possibility here based on the one-sided exposure in the marketplace. What are the implications? That's what I'm mostly concerned with.
I know a lot of you guys follow and trade the VIX much more than I do. So if some of you would like to weigh in down in the comment section, I would be curious to read what you have to say. Feel free to discuss.
Tags: $VXX $VIX $SPY