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.
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.