Investors bet on volatility, fears grow

DNE
DNE
4 Min Read

Fears of stocks tumbling are making investors so desperate that they are willing to lose capital to protect their investments
Wall Street’s CBOE Volatility Index or fear gauge continued to increase along with the exchange-traded funds, as investors continued to put record sums in it over the past months.

At the moment, many of these wagers are made with leveraged product, which in fact more than doubles the stakes.

This is considered by analysts a secure way of protecting against the possibility of a significant drop in US stock indexes, but it is also a favourite recipe for losing the invested money.

Many investors are positioning themselves for a possible reversal of the recent market rally that increased the S&P 500 up by more than 12% since last month. This can be seen clearly as the demand for products is one of the most recognisable signs that investors are positioning themselves. This in fact leaves them mostly flat for the year and causes a sharp fall in the VIX. Fears of stocks tumbling have spread among investors, and this is evident in their willingness to lose money to protect their investments.

The investment it the UVXY (ProShares Trust Ultra VIX Short-Term Futures exchange-traded fund) and the TVIX (VelocityShares Daily 2x VIX Short-Term exchange-traded note) have almost tripled from the beginning of March, at the moment both of them have more than $1.5bn in assets. Investors cannot trade the VIX, but have the ability to sell futures and products tied to the index. Typically, when stocks start to tumble, the VIX increases.

The head of Janus Capital Group, Nick Cherney, said investors have put in stake all their wages, approximately $3.5bn, that VIX will increase in value. Nick Cherney is also the owner of VelocityShares.

On the other hand, there is an advantage in all this, because products regularly shrink in value for those who hold them longer than a day. There is a consistent buying of more expensive and longer-dated VIX futures and constant selling of cheaper shorter VIX futures, because they ordinarily they post negative returns for longer periods of time. The indication of a bigger decrease in performance was evident last Thursday as the levels in the front and the second month VIX futures was 1.70, compared to 0.35 at the end of 2015.

According to trades, leveraged products are useful when it comes to short-term trading, because less money is paid up front that might be needed for equivalent no leveraged trades. Buying such a share of one of the products essentially means that two bets on rising volatility are placed, offering bigger gains, as well as more significant losses.

The average trading volume on UVXY reached a record trading high of 54m shares in January 2016, due to the turbulent market environment caused by the fall of Chinese stocks. Many traders have once again placed their bets, sensing the uncertainty of other investors.

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