With risky bets back in play, stock selloff revives 'Volmageddon' memories
By Trevor Hunnicutt
NEW YORK, Oct 12 (Reuters) - Months after he lost millions
when an esoteric corner of financial markets cratered in
February, former Target Corp store manager Seth Golden is
betting against volatility again.
Golden, who says wagers on market calm earned him millions
in the past six years, is among the investors who have kept
trading complex financial products linked to the Cboe Volatility
Index - Wall Street's "fear gauge" - in the months since
some of those products blew up.
"The majority of 'vol sellers' were not damaged in February.
It was the Johnny-come-latelies and people who shouldn't have
been trading volatility in the first place," Golden said.
This market is back in focus after another rapid stock
market slide pushed VIX to as high as 29 from early October lows
under 12, and given a gradual rebuilding of trades betting the
volatility will not last.
While many investors smarted, others kept coming and between
March and September, more than $1.2 billion rolled into
U.S.-based exchange-traded volatility products, according to
Reuters calculations based on data from FactSet Research Systems
Inc, which tracks the investments.
That compares with $1.7 billion the month before the early
February "Volmaggedon" when stocks sold-off briefly on fleeting
inflation fears, the VIX shot up to 50 on Feb. 6 from 18 the day
before, and some investors lost over 90 percent of their
Golden, who gained prominence after the New York Times
profiled him in 2017 and now runs a website that offers advice
to traders, said that he had already more than recovered his
February losses as he kept borrowing VIX exchange-traded
products, selling them and buying them back when the price goes
down. Reuters could not independently verify his accounting.
Golden said he cashed in some of his profits before the
latest volatility spike and now was waiting for the market to
reverse to get back in.
"These are the days I live for," he said during the market
selloff this week.
The February crash sparked a debate whether the VIX index
and the related products were prone to manipulation and led to
dozens of lawsuits and ongoing probes into the matter by U.S.
Since then, both the Cboe exchange, which owns the
VIX index, and issuers of some of the related products have made
changes they say should make the market less prone to violent,
The exchange has modified its auctions that determine the
price of VIX futures to boost liquidity while the backers of
some of the volatility products tweaked them to reduce leverage.
For example, ProShare Capital Management LLC, backers of the
widely used ProShares-brand vol products, restructured one
product so it would aim to move less in response to changes in
the market, losing 0.5 percent, instead of 1 percent, when the
index it tracks increases by 1 percent.
So far, those steps seem to have worked.
The $370 million ProShares Short VIX Short-Term Futures ETF
, which tumbled over 80 percent in a single day in
February, sank 8.3 percent on Wednesday, lost 4.6 percent on
Thursday and rebounded 3 percent on Friday morning.
Early this month, Barclays Plc analysts who argued the
February plunge was "technical in nature" wrote that a strong
U.S. economy and so far limited economic impact from trade
conflicts, emerging market currency declines and upcoming
congressional elections should support the short-vol trade.
This week, however, they said their views have changed given
an increased chance of a Federal Reserve policy misstep and
investors' increased focus on the effects of a trade war between
the United States and China.
"We expect volatility to remain elevated in the short term
and do not recommend buying this dip," they wrote.
"The difference is that this time there are some genuine
catalysts we can point to," one of the authors, Maneesh
Deshpande, told Reuters.
While investors trade VIX futures to guard against market
declines and turmoil, those derivatives have a tendency to lose
value in steadily rising markets as demand for such protection
declines. Inverse-vol products launched and listed on exchanges
after the 2007-2009 financial crisis allowed investors to take
advantage of that and profit during extended spells of market
Originally designed as a sophisticated hedging tool for
professional investors to help manage their daily market
exposure, inverse-volatility products became popular among small
investors when the products listed on exchanges and took on a
new life as a lucrative bet on market calm.
Gains of nearly 600 percent over two years up to February
vaulted the products onto various lists of top performing
investments and made them the subject of excited conversation on
social media and financial websites.
"The pros, a lot of them were right back in there a week or
two after February," said Russell Rhoads, head of derivatives
research at TABB Group LLC.
"There's lots of people trying to pick stocks. The major
hedge funds are all doing the same thing, and the volatility
space has opened things up for people that are willing to do the
work to find a new way to speculate on the market."
Some analysts blamed the severity of the crash in part on
excessive leverage and over-confidence of ill-prepared retail
"It's more or less a substitute for going to Las Vegas - you
can do it from your home office," said Robert Whaley, a
professor at Vanderbilt University who developed VIX.
Whaley stands by VIX as a market gauge but is concerned that
volatility-themed exchange-traded products pose risk to retail
There is no record of how many retail investors are in the
trade, but available data suggests they still play a sizeable
role in the market.
Institutions required to report certain holdings, typically
traders and fund managers overseeing more than $100 million,
account for between 3 percent and 62 percent of U.S. volatility
exchange-traded funds' assets, with the balance held by those
who do not make such filings, including smaller funds and retail
investors, Refinitiv data shows.
Stuart Barton, managing partner at Invest in Vol LLC, an
investment adviser, which uses the products, said those
investors are taking big risks again.
"The moves by the surviving products to lower their leverage
has been a good move but that's only half the story," he said.
"People just take twice the position."
(Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and
© 2018 Thomson Reuters. All rights reserved. Reuters content is the intellectual property of Thomson Reuters or its third party content providers. Any copying, republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters shall not be liable for any errors or delays in content, or for any actions taken in reliance thereon. "Reuters" and the Reuters Logo are trademarks of Thomson Reuters and its affiliated companies.