Volmageddon Blowback – CBOE Crashes 30% To 6-Month Lows

It appears the Cboe’s conference call last night – to explain how they are not dependent on crazed VIX-structure traders – did not work…

As we detailed last night, 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.