VIX Traders Flip to Betting on Volatility ... and Stocks Rally

VIX Traders Flip to Betting on Volatility ... and Stocks

Stocks are rallying Monday, extending Friday’s late afternoon, but what’s really changed? It seems the speculators in the VIX once again hold the clue.
Not so much the players in the exchange-traded products, such as the ProShares Short VIX Short-Term Future (SVXY), but where the big speculators scrum, the future VIX on the Cboe Futures Exchange. Shorting VIX futures was last year’s “can’t-miss” trade, given the well-recognized somnolent level of volatility. Add in the contango factor in the future VIX. Distant contracts traded at a higher price than the contract, so the converging on the spot VIX, which all but goal guaranteed profits on a short position. That is, until volatility shoots up, which it did, putting the VIX shorts deep in the hole. No wonder, then, that future speculators in VIX shifted massively to the long side from the shorts during the upsurge in volatility that roiled the stock market. According to the latest Commitment of Traders report from the Commodity Futures Trading Commission, the swing of the market Nomura Global Markets Research . (More wonkish stuff: that’s based on the z-score, which is based on how many standard deviations a quantity has changed.) Since hitting a peak of 50 last week, the VIX has been almost cut in half, to just under 27. While it was a sight of the single digits, the decline in volatility has accompanied equities’ current bounces. In any case, the drop in the VIX seems to be a classic contrarian move when the specs has moved strongly to betting on higher volatility – just as it peaks. Aside from these technicals, Nomura thinks the fundamentals have changed. “With overall strong economic and robust financial conditions in the US, this VIX overshoot looks more like a technical crisis than a fundamental crisis. . ” Bottom line: This market upheaval always was about a shift in the interest-rate regime . Tea vol plays were the symptoms , not the cause, of the bug that’s bit the stock market.

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