Sure, this is an article from this year but it certainly needs something like a [FEBRUARY] tag on the title given they aren't talking about the recent slump.
This is an old article but the dynamic is always applicable. Your main issue is that anything that isn't statically replicating, ie simply holding a constant basket of whatever it's supposed to track, needs to rebalance. The bigger the deviation the more unfavourable that is. What vol traders call negative gamma or convexity if you are from the fixed income world. The problem is you are pushing the wrong way on prices when you need to rebalance.
The thing is the markets have been in a very low vol environment for a long time, possibly ending in the last couple of months. We'll see. But until then it was quite a popular trade to be short options.
You can Google optionsellers.com to see what happens when things go wrong.
It sounds like this applies to broad total market index funds too. I still feel like I don't know shit about the stock market so forgive me if that's a 101 question.
If I am an index broadly tracking the market, weighting each stock by market cap or whatever, then if it goes up, I have to buy more. If it goes down, I have to sell. Is that right? Is the that kind of rebalancing you're talking about?
It sounds like a positive feedback loop that could run away. Stock X goes down, forcing some index to sell it, forcing it further down, forcing them to sell more, etc.
I’ve looked and not found the daily volume for the entire market before now. Is there a simple way to look that up? Or even other time frames? All I see are volumes for particular stocks.
Thank you for your insight! Iirc, low volume is consistent with elevated prices across the board. And, of course, corrections are to be expected.
A lot of people were wondering why the XVI and SVXY products collapsed so quickly even though spot volatility was not up that much and SVXY and XV were only down 15% for the day yet were down 80% the following day.
The answer is kinda subtle and most sources don't explain it well. The reason is, volatility futures trade until 4:15 but the market closes at 4:00. So this means SVXY and XIV reset at 4:15 instead of 4:00. This means the 80% termination clause is not based on the market close but actually based on the 4:15 price of volatility futures close. In the after hours in that fateful 15 minutes, the futures saw a massive surge and crossed the 80% liquidation threshold. After 4:15, SVXY and XV began to dive because at that point they were dead, but the decline was initially gradual because most people did not realize what had happened. That 15 minutes is what made all of the difference.
Well, the VIX futures trade well after 4:15. What I don't understand is that the collapse didn't happen just in the last 15min after the session but progressively up to a an hour or two after if I remember. The underlying S&P VIX strategy seems to be using a fixing as of 4:15 indeed per the S&P documentation [1].
In any case, setting the fixing in the middle of an illiquid market was a moronic decision and if I had been burned by this, that would be my potential avenue for litigation.
Also I wonder how much of this short squeeze was amplified by other market participants who anticipated this event could happen. Some trading desks made a killing that day.
The article is from February but it is worth studying the headline which puts the problem on "two tiny" whatever. Looking back the market was around a top and was struggling to move higher. Not a tiny issue more a major top.
Lesson: Study headlines for wishful thinking and draw conclusions.
It's a postmortem of the mini-crash we saw in February. No one was expecting it, and it happened very fast. One day the Nasdaq futures are trading at 7100, the next day they are at 6100. Moves of 100 points(a whole day's worth of movement) were happening in 15-20 seconds. Just for some context, 100 points(on the Nasdaq) is $2,000 gained or lost, using the minimum size you can trade.
I think the entire VIX formula should be restudied as the options market it has been based on is very different now
The SPX index options and SPY ETF options now have 20 options series trading at once at any given point in time.
There is a front series expiring every single day.
This is very different from 1993 when VIX started or the aughts or even last year.
The volatility curve is front loaded by greed, but when opex was only quarterly or monthly, this pile up could more accurately accumulate into the VIX fear guage that we know and have studied comprehensively
Now with “fear” diluted amongst so many options contracts, I really think this should all be reevaluated. The VIX index and VIX futures and VIX futures options and VIX ETFs based on selections of VIX futures all rely on the trading activity of SPX options, and this formula doesnt have the same inputs anymore
actual forumula is time agnostic; VIX itself is an application of formula to particular inputs
> The VIX index and VIX futures and VIX futures options and VIX ETFs based on selections of VIX futures all rely on the trading activity of SPX options, and this formula doesnt have the same inputs anymore
from above link:
"In addition to the VIX Index, Cboe calculates several other broad market volatility indexes including the Cboe Short-
Term Volatility Index (VXST
SM
) - which reflects 9-day expected volatility of the S&P 500 Index, the Cboe S&P 500® 3-Month
Volatility Index (VXV
SM
) and the Cboe S&P 500® 6-Month Volatility Index (VXMT
SM
). Cboe also calculates the Nasdaq-100®
Volatility Index (VXN
SM
), Cboe DJIA® Volatility Index (VXD
SM
) and the Cboe Russell 2000® Volatility Index (RVX
SM
). Currently,
RVX futures are listed on CFE and RVX options trade on Cboe. "
but yes, agree, perhaps one should rely on the VIX number itself less readily..
Although there are a lot more options nowdays(heh), I'm pretty sure that the VIX only looks at implied volatility in options ~30 days to expiry. So the new, short term options do not factor into its calculation.
[+] [-] joe_the_user|7 years ago|reply
[+] [-] lordnacho|7 years ago|reply
This is an old article but the dynamic is always applicable. Your main issue is that anything that isn't statically replicating, ie simply holding a constant basket of whatever it's supposed to track, needs to rebalance. The bigger the deviation the more unfavourable that is. What vol traders call negative gamma or convexity if you are from the fixed income world. The problem is you are pushing the wrong way on prices when you need to rebalance.
The thing is the markets have been in a very low vol environment for a long time, possibly ending in the last couple of months. We'll see. But until then it was quite a popular trade to be short options.
You can Google optionsellers.com to see what happens when things go wrong.
[+] [-] imh|7 years ago|reply
If I am an index broadly tracking the market, weighting each stock by market cap or whatever, then if it goes up, I have to buy more. If it goes down, I have to sell. Is that right? Is the that kind of rebalancing you're talking about?
It sounds like a positive feedback loop that could run away. Stock X goes down, forcing some index to sell it, forcing it further down, forcing them to sell more, etc.
[+] [-] ianai|7 years ago|reply
Thank you for your insight! Iirc, low volume is consistent with elevated prices across the board. And, of course, corrections are to be expected.
[+] [-] paulpauper|7 years ago|reply
The answer is kinda subtle and most sources don't explain it well. The reason is, volatility futures trade until 4:15 but the market closes at 4:00. So this means SVXY and XIV reset at 4:15 instead of 4:00. This means the 80% termination clause is not based on the market close but actually based on the 4:15 price of volatility futures close. In the after hours in that fateful 15 minutes, the futures saw a massive surge and crossed the 80% liquidation threshold. After 4:15, SVXY and XV began to dive because at that point they were dead, but the decline was initially gradual because most people did not realize what had happened. That 15 minutes is what made all of the difference.
[+] [-] cm2187|7 years ago|reply
In any case, setting the fixing in the middle of an illiquid market was a moronic decision and if I had been burned by this, that would be my potential avenue for litigation.
Also I wonder how much of this short squeeze was amplified by other market participants who anticipated this event could happen. Some trading desks made a killing that day.
[1] https://us.spindices.com/indices/strategy/sp-500-vix-short-t...
[+] [-] totoglazer|7 years ago|reply
[+] [-] nsrivast|7 years ago|reply
* derivatives are a leaky abstraction. Understand how the underlying securities work all the way down
* read the docs!
[+] [-] module0000|7 years ago|reply
* The VIX(futures contract) is the most accurate pulse of the equity futures market I have seen.
* The price of the VIX is no more important intra-day than the depth of the VIX's inside bid/ask.
* When VIX depth adjusts, so do equity future prices, over the course of 5-10 seconds.
* Be fast, I mean really fast. Or better, program your trading platform to be fast so you don't have to.
[+] [-] cheez|7 years ago|reply
[+] [-] heisenbit|7 years ago|reply
Lesson: Study headlines for wishful thinking and draw conclusions.
[+] [-] cjbenedikt|7 years ago|reply
[+] [-] module0000|7 years ago|reply
[+] [-] loeg|7 years ago|reply
[+] [-] gammateam|7 years ago|reply
The SPX index options and SPY ETF options now have 20 options series trading at once at any given point in time.
There is a front series expiring every single day.
This is very different from 1993 when VIX started or the aughts or even last year.
The volatility curve is front loaded by greed, but when opex was only quarterly or monthly, this pile up could more accurately accumulate into the VIX fear guage that we know and have studied comprehensively
Now with “fear” diluted amongst so many options contracts, I really think this should all be reevaluated. The VIX index and VIX futures and VIX futures options and VIX ETFs based on selections of VIX futures all rely on the trading activity of SPX options, and this formula doesnt have the same inputs anymore
[+] [-] cat199|7 years ago|reply
https://www.cboe.com/micro/vix/vixwhite.pdf
actual forumula is time agnostic; VIX itself is an application of formula to particular inputs
> The VIX index and VIX futures and VIX futures options and VIX ETFs based on selections of VIX futures all rely on the trading activity of SPX options, and this formula doesnt have the same inputs anymore
from above link:
"In addition to the VIX Index, Cboe calculates several other broad market volatility indexes including the Cboe Short- Term Volatility Index (VXST SM ) - which reflects 9-day expected volatility of the S&P 500 Index, the Cboe S&P 500® 3-Month Volatility Index (VXV SM ) and the Cboe S&P 500® 6-Month Volatility Index (VXMT SM ). Cboe also calculates the Nasdaq-100® Volatility Index (VXN SM ), Cboe DJIA® Volatility Index (VXD SM ) and the Cboe Russell 2000® Volatility Index (RVX SM ). Currently, RVX futures are listed on CFE and RVX options trade on Cboe. "
but yes, agree, perhaps one should rely on the VIX number itself less readily..
[+] [-] tryptophan|7 years ago|reply