‘What Will Happen If VIX Spikes?’ Deutsche, Barclays Answer The Unanswerable
Well then, with the VIX now back at a 15-handle, and with the NDX VIX surging as the Nasdaq breaks below its 50-DMA, this is probably a great time to update you on exactly what happens in the event we get a sustained vol. spike.
The first, and perhaps most important number of all, is the infamous vega to buy on an "N-vol" move in weighted average VIX futs. Colloquially, this is the "oh-shit-o-meter" - or, a way of estimating the magnitude of an expected mad rebalancing scramble by inverse and l
While this is all incredibly interesting to discuss, I can’t help but get the feeling large catastrophic events in VIX ETPs are fairly theoretical, and in the current environment, would likely require more than a 6 sigma event on 3m rolling returns on SPX. That’s purely a gut feeling though, but the fact open interest is spiking to such levels seems to indicate VIX ETP managers are scrambling to cover themselves, even at the expense of lower returns.
oh it’s theoretical all right. that’s what makes it so damn funny. no one has any idea what the implications of the current market microstructure are.
love volatility porn in the morning (in australia)
“vol. porn was the only thing that saved my life when I was in ‘Nam”…