Derivative on volatility index squeeze leaves blood on the Street

So what is driving the market turmoil over the last three trading sessions, it’s volatility.

No, not volatility per se, but the derivative option trades connected with volatility index.

The VIX — or fear index — soared more than 260% over last three days, and was over 50, which is the highest it’s been since 2008 financial crises.

So one of the derivative options off of the VIX is the XIV Exchange Traded Note, which was closed out today due to 95% losses on the VIX short squeeze.

Ok, now in English. If you wanted to bet against volatility rising you could take this note (XIV) and use 20-30 times leverage with no problem. Until there is one as it became a very crowded trade.

By Friday morning with hints of a memo coming out later in the day charging Dept. of Justice and FBI being crocked, the VIX started rising, which put pressure on the XIV.

By Monday morning when options trading opened up, the VIX was soaring. By noon there were signs of large funds imploding over being squeezed by their XIV positions and began selling the kitchen sink to get out of the trade.

That’s when the Dow was crashing. Hitting -1,500 points around 1PM Monday. As I wrote at the time that the Plunge Protection Team stepped in to bolster the market and cut the point loss in half in the next 30 minutes.

I believe we will hear Wednesday which funds were caught up in the XIV carnage and will need to close down. Given the dramatic moves — reminiscent of bitcoin pricing in December — there must be some blood on the street.

 

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One thought on “Derivative on volatility index squeeze leaves blood on the Street

  1. Pingback: Plunge Protection Team leaving fingerprints on Tuesday’s market moves | Gray's Economy

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