When it does end, we will likely see a massive rally take place that most traders will end up missing (or joining at very late stages). This selling won’t continue for too much longer, but of course I have no idea when it will end. Algorithm trading compounded the effect, which is how/why such big moves can occur. Check out the charts of VXX, VIIX, TVIX and others to see what I mean. This strategy continued for the entire week. To offset long volatility (the unwinding that needed to take place), traders shorted SPX futures. Put simply, the trade needed to be unwound, which takes time. It was truly a ticking time bomb, the black swan event that the smart money knew would happen eventually. I doubt anyone who was long these inverse products expected this or even thought about the consequences (a massive loss). Because these products have an “out” clause that allows traders to terminate at an 80% loss, they did – in droves. When the VIX (volatility index) rose 100% on Monday, short volatility products like XIV and SVXY were toast.Ī 100% move up in VIX meant this products would shoot down to zero, and beyond that they would go negative. For years, this was a successful play, and a lot of traders were using this strategy. Volatility short sellers started the stock market turmoilĪbout 90% of the selling last week was done by short sellers of volatility products, which imploded in their faces. About one third of the wealth created during 2017’s bull market was wiped away in a few short days. Never in market history has the Dow Industrials dropped 1,000 points – and it happened twice last week. The recent downdraft is suffocating markets and players it is uncomfortable at best and quite scary at worst. You are probably feeling panicked after the chaos last week, so let’s take a step back and look at the stock market turmoil as objectively as possible.
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