Cboe Hosts Call On Recent VIX Chaos

Update: As the 4:30 ET call began, Ed Tilly, the CEO of Cboe, hopped on an analyst call Wednesday afternoon to dispel certain “misconceptions” about the events of Monday, which left many retail traders totally wiped out and forced the liquidation of one popular short-VIX ETF.

Questions and misconceptions – it’s largest single day increase on record. This is important because VIX continued to function as did the ETPs connected to it.

During the unprecedented surge, VIX and VIX-related ETPs continued to work as designed, said Tilley. Funds that were long volatility benefited, while those who were short suffered, Tilly said.

Of course, as we’ve noted in the past, there were formerly $22 trillion across all trading strategies and asset classes piled into the short volatility trade.

Products and strategy designed to respond to low volatility prove to be effective tools as volatility increased. This is in no way to minimize the impact this had on investors, Tilly said, but to take a step back ad look at the broader market implications.

“Trading in our products was orderly and liquid, and they overall worked as designed,” Tilley said.

Furthermore, he framed the selloff as “an opportunity to educate investors about how to trade volatility products.”

“The period that we’ve been trading, 2018, has been marked by a trend toward investors putting on larger positions in these products, presumably because the short volatility trade has been profitable these past few years,” Tilley said.

I think short vol has been around since options and derivatives were listed, and will continue to be an active strategy despite the events of this week.

After all, institutional traders have plenty of other options or shorting volatility, from buying put options to shorting long-VIX ETPs, some of which might find renewed interest.

In summary, the massive short-vol position has taken a massive hit – but its far from dead.

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After a record-long streak without a 5% pullback in the S&P 500, the US equity markets lazy post-election boat ride was violently disrupted this week when a confluence of fears – including the showdown over the FISA memo, an optimistic average hourly wage number and anxieties about rising interest rates – sent markets spiraling lower, with the S&P 500 and the Dow recording their worst daily drop since August 2011, when Standard & Poor’s stripped the US of its AAA credit rating.

The violent moves have caused tremendous losses destroying inverse VIX ETPs in the process.

So with their stock tanking, the executives at CBOE are holding a phone call at 4:30 ET with journalists to explain how this is just a temporary speed bump, everything is still awesome and that retail investors who piled into those assets were aware of the risks they were taking.


Of the two major options exchanges, the Cboe is the most heavily dependent on selling products tied to the VIX – which it created.

A KBW report released this morning showed 20% to 25% of Cboe’s revenues come from VIX-related products,  according to David Lutz of Jones Trading.

“The concerns are that this could impact CBOE’s VIX’s volumes,” said Richard Ripetto, an analyst at Sandler O’Neill + Partners.

As we pointed out yesterday, Monday’s historic VIX move has bascially destroyed an entire asset class: the inverse VIX ETN are no more, meaning retail investors no longer have a handy, convenient way to short volatility. Unfortunately, this means retail will simply short VIX ETNs like VXX, exposing themselves to unlimited downside risk – but hey, that’s what natural selection is all about.

But while the short VIX ETN industry may have been eliminated, following several “termination events” for ETNs such as the XIV, it represented only $3 billion or so in assets; as such it is a small fraction of the total systematic vol sellers, including Risk Parity funds, CTAs, vol targeters, annuity funds and according to Fasanara Capital, everyone else, in what is one massive, $22 trillion, low-vol bet.

The VIX increased by 115% to 38.3 on Monday – its single biggest increase on record – while the S&P 500 dropped 4.1%.


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