Volatility warning

Trading and Markets
1

I will keep this simple. The brokers are all freaking out about the VIX - and retail spec shorts on the futures side are through the roof, if there is a squeeze, it will get bad. However, the fact that everyone is talking about this leads me to believe volatility will drip lower, and people will forget about all this, and then one day, it will explode.

FOR NOW…

You need to be aware Interactive has taken the highest industry standards I have seen in increasing their margin requirements. Basically, roughly for every $100 you want to make uncovered shorting the VIX, it requires $10,000 in capital - and covered positions margin wise is just as ridiculous - every $100 you want to make COVERED - requires $3,000 in capital. Prior to this fiasco, you could roll $100 uncovered with $3,000 in capital. So you see how they reverse bazooka’d this thing.

What people need to know if they are trading volatility instruments.

You need to be hedged into EVERY market close. Interactive is pricing a VIX move to 37 overnight, that’s what they are telling me. This means Armageddon, it’s sort of funny they are telling clients this, but I suppose it still is possible. I am still saying I think the trade is the other way around, but we still need to take note.

if you have any systems shorting volatility in any way shape or form, you need to hedge them on your own. the reason they have even made covered positions so margin intensive, is because they expect the markets to go illiquid when this pop happens. This further protects them (the broker) when the calls come in and the traders on the desks have to force liquidate clients, during wide bid/ask etc. if the market is wide, and you are covered, they assume their new requirements will cover them. So you must hedge with CASH, not options.

sorry for the lack of brevity and bad typos, I am busy these days and not compensated on C2 right now.

but you do need to hedge those systems into EVERY close to avoid disaster. C2 currently does not calculate margin correctly at all on the VIX instruments, which can only further lead to problems for the account. please keep this in mind.

1 Like
2

From a macroeconomic perspective, the economy is growing, inflation is contained and earnings are growing. Therefore any spike is vix will likely be from a non-macro event, Nt Korea, War etc. I run the Worldwide Leaders strategy on C2 and I spend a substantial amount of time looking at the macro economic landscape, and from my perspective we wont have a credit crunch or recession in the short term…

So it will take a black swan event from left field, eg war etc to get the vix to spike in the short to medium term(up to 6 months)

3

I agree. However, what happened in the year 2000? Replace bitcoins with the internet and wallah. Yes, this time a bit different as long as the market remains isolated, which we can thank ICOs versus IPOs for doing that.

4

I don’t believe that this is true. When I look at the portfolio in Smart Volatility Margin at the market close today, I’ve got $17,400 in short TVIX, $10,600 in long SVXY, with SVXY and VXX options as protection. For those short volatility positions, the initial margin requirement is only $18,000 combined…so nowhere close to what you’re implying. Thanks, David.

5

Who are you trading with? Go into interactive brokers, pull up the Strategy Builder and check for yourself. We are talking about VIX - the VIX - not the leverage funds. Maybe you should ask for clarification on the instrument first, like any real trader would do. I said shorting THE VIX, couldn’t be more clear. Yep, you’re wrong! Edit: Thanks, TradePro. LOL okay lets be clear about this, you do know what I’m talking about David, right? You have seen MCProTrader, programs like that. Give me a break.

6

seriously, what are you talking about - cash or options? I avoid the leveraged funds in shorting options for a reason, but if we go into strat builder, and say short 3 of the 19 calls exp oct 27 @ .40 for a $100 payout - maintenance margin is now $18K - and no - this is not currently calculated correctly on C2 and yes - that is an insane amount of maint req.

edit: its not like this everywhere, I trade professionally with many brokers. At Fidelity, you need roughly $4500 for every $100 you would like to short naked VIX options. Not everyone is like this currently.

edit again: we are talking about shorting options at the week, in that sense, again like MCProtrader, the popular systems here doing this are doing it AT THE DAY sometimes, so yes these margin examples apply.

7

I’m trading with Interactive Brokers. I’m not going to get into an argument, so this will be my last post in this thread. But you didn’t specify which volatility products you were talking about. You can’t trade the VIX directly, so it was not clear in your post. When most readers read “Volatility Warning”, they probably assume volatility ETPs - so that’s what I was addressing, which I made clear by specifying the names of the ETPs specifically. So, I assume you were actually talking about VIX options - if that’s the case then your information may be correct - but I got some emails from people concerned about your post thinking it related to ETPs - so I was trying to correct that misconception. If I was not clear enough in my response, I do apologize. Thanks, David.

3 Likes
9

Hi David,
I think IB might have changed its margin requirement for volatility products this morning. When I look at my IB Account Window my margin now is less than half of what it was yesterday when I had basically the same volatility exposure - Karl

12

You know 1929 and 1987 we had this situation too and then out of nowhere coms a heavy correction on a single day and let volatility explode?
Absoluterly no event lead to this crashes.