12 September 2016 at 8:01 GMT
- Stock market futures positions decline but remain elevated overall
- Friday sees 11th largest one-day VIX spike since the index's 1990 introduction
- Aggregate total VIX futures volume curve jumps to 472,000 lots Friday
Fault lines: Friday's dramatic VIX spike attracted yield-hunting shorts. Photo: iStock
By Ole Hansen
During the week ending September 6 the speculative, or non-commercial value, of the positions held in the three major US stock market futures had retraced somewhat from the previous week's record level...
... but it remained clearly elevated above $400 billion.
While stocks continued to climb, the complacency and the search for yield had made short-selling of the CBOE VIX index increasingly popular, either through futures or exchange-traded funds (i.e. SVXY:arcx). The volatility curve tends to have a contango shape where the cheapest volatility is found at the front.
By short-selling the front and rolling at expiry, traders have been extracting anywhere between 1% and 2% on a monthly basis. This strategy, however, is very dangerous as it can be best be described as running in front of a steamroller picking up nickels.
If you fall, it gets very painful.
The green line was how the volatility curve looked a week ago and the orange was how it was left after the carnage on Friday...
The volatility jump on Friday was the 11th biggest one-day move since the VIX index was introduced in January 1990. The hunt for yield and general level of complacency have seen the short position in the VIX futures hit continuous new records during the past few weeks.
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Source: Saxo Bank
The aggregate total volume across the VIX futures curve jumped to 472,000 lots on Friday from a recent daily average around 150,000 lots.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank