Buyers Burned as Bets on Low Market Volatility Implode

Stocks slumped again on Monday extending the volatility that emerged last week as investors grew more worried about turmoil in the bond market

Products directly linked to the VIX may manage as much as $8 billion, according to SocGen estimates.

The S&P 500 Index .SPX slumped more than 4 percent on Monday while the VIX index - Wall Street's so-called fear gauge - registered its largest-ever single-day jump. The ETNs were specifically created to deliver the returns if the volatility stayed low.

And shares of CBOE Global Markets, which owns the Chicago Board Options Exchange, fell more than 10 percent Tuesday on investor concern that the failure of products like the VelocityShares note might make other volatility-related products less popular.

MRA surmises that the inverse-VIX implosion was a major contributor to a considerable S&P futures selloff after the United States market close. Indeed, three month implied volatility for the euro this week is well below 2017 highs. He warned that a "sudden eruption" of volatility could leave traders "badly burned".

I've spent the last day talking to traders trying to reconstruct what might have happened. The stock decreased 3.07% or $3.5487 during the last trading session, reaching $112.0013.

Meanwhile, ProShares will continue to operate SVXY, which is structured as an ETF. Risk parity attempts to hold an equal amount of risk across asset classes and uses longer-term volatility inputs - it won't trade based on a few days of volatility spikes.

The repercussions have been severe for some funds. The opposite to the XIV product are VIX short-term futures.

On Tuesday, Credit Suisse AG, the issuer of XIV, exercised its discretion and announced the redemption of the note.

"Not only do we expect volatility to increase in 2018, and would urge investors to remain cautious of leveraging positions too far, but we also anticipate that markets will retain the effects of volatility shocks more deeply in their collective conscience", said Eoin Murray, head of investments at Hermes Investment Management, which controls 31 billion pounds of assets.

Months of extended calm in the stock market has made selling volatility a lucrative affair.

Highly leveraged yield-seeking strategies in high yield bonds or commodity-linked currencies that have mushroomed in the aftermath of the 2008 global financial crisis are likely to come under pressure the longer volatility stays high.

The spike in volatility does open up some attractive options market opportunities.

During its rapid surge higher, the VIX outpaced the VSTOXX, an event analysts flagged as an extreme move, also suggesting there would be a rapid normalization. More than a dozen of volatility-pegged products were halted on Tuesday as the Cboe Volatility Index gyrated wildly.

Tracking other technical indicators, the 14-day RSI is presently standing at 75.58, the 7-day sits at 80.66, and the 3-day is resting at 82.18 for VIX Mid-Term Futures ETN Ipath (VXZ).

Monday's volatility shock in US stock markets had led to some misconceptions about the Cboe Volatility Index, known as the VIX.VIX, and related exchange-traded products (ETPs), Cboe's Tilly said.

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