Investors bet on volatility, fears grow

by James Hendrickson on March 28, 2016 · 8 comments

032816Fears 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, which is considered by analysts as a secure way of protecting against the possibility of a significant drop in U.S. stock indexes, but also it’s a favorite 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 recognizable signs that investors are positioning themselves. Which in fact leaves them mostly flat for the year and causing a sharp fall in the VIX. Fears stocks tumbling have spread among investors, and this is evident by 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 1.5 billion dollars 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 that investors have put in stake all their wages, around 3.5 billion dollars, 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. Because 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 of the less money which is paid upfront, 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 as well as bigger gains, as well as more significant losses.

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

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