S&P 500

SocGen: ‘Retail Investors Just Learned A Very Painful Lesson’

Many who are first will be last, and many who are last will be first.

Yes, hello Target? It’s me Bob. I know I quit last year and I know that on the way out the front door I made a big production out of things by kicking over the new releases DVD display while shouting something crazy about how I was rich from shorting something called ‘the VIX’, but I wondering if you’re hiring.

I’m sorry, but the Target manager-turned vol. seller story is never going to get old after Monday.

For years, everyone sat by and watched incredulous as retail investors logged triple-digit returns doing something they had no business doing using vehicles that shouldn’t exist, and on Monday, the chickens came home to roost. The dreaded “acceleration event” came calling and suddenly, the wives of former big box retail managers were trying to figure out why their husbands were poring over ETN prospectuses at the dinner table.

“I just won’t tell her – maybe I can make up the difference buying the Bitcoin dip overnight.”


But on Tuesday morning there was no escaping reality. Credit Suisse pulled the plug on XIV and just like that, dreams turned to nightmares.

“It’s all fun and games until someone reports an ‘event acceleration.'” 

Everyone is still picking up the pieces on Tuesday, but the dramatic plunge in shares of CBOE certainly seems to suggest that there are now questions about what the future holds for the volatility landscape in general. One thing’s for sure, “retail investors that have been wiped out by this trade may not be too keen to trade volatility going forward,” to quote Wells Fargo.

Meanwhile, on the Street, analysts are trying their best to avoid titling every note “I told you so”.

On that score, SocGen has a brief piece out documenting their first reaction and although it’s similar to everything you’ve probably already read, it’s worth highlighting if for no other reason than to show you the hilarious caption on the chart in the right pane below:


“Many who are first will be last, and many who are last will be first.” And also, “many who were first may never be anything again.”

Here’s SocGen with a couple of quick bullet points:

There is evidence that disorderly unwinding in the crowded short volatility trade has been the main factor behind the acceleration in the VIX spot. Equity volatility has so far been impacted significantly more than any other asset class, and the VIX has been impacted much more than the VStoxx (we know that the bulk of the short volatility trade is based on the US volatility index). Also, the surge in the VIX was much greater than the decrease in the S&P 500 during the initial move. Only subsequently did the S&P 500 follow on the downside, as more equity selling was probably triggered in order to cover margin calls or losses on short VIX positions, and eventually to protect some of the profits registered.

Short volatility trade, any candidates left? With the constant 1m VIX future roughly doubling on Monday, the loss on the main short VIX ETNs are going to be abyssal (probably around 95% on the day on the NAV for XIV and SVXY, see chart 2).

Short volatility investors, and retail investors in particular, may have learned a very painful lesson. Even for a long-term investor, free of any mark-to-market constraint, it would require incredible patience to recover these losses (roughly three years of perfect market conditions at a 200% return per year) if all the short VIX ETNs are not simply called back (or redeemed) by the issuer. With the pain fresh in investors’ minds, the number of candidates (and vehicles) for another ride might be limited.

Yep. We’ll say it again: “There’s always Target.


2 comments on “SocGen: ‘Retail Investors Just Learned A Very Painful Lesson’

  1. i give in–sold the short positions sds, bis, qid and vxx. i bought the BTFD.
    small ura miners, rear earth remx and a bunch of little miner guys.
    also got long Japanese and american banks, assuming rates go up i am short bonds as well. (long dated options)–the short bond trade has been good for the last few weeks.
    thanks H
    good luck to all

  2. Trading has been er…. tough over the last few days, whipsaws all over the shop, but can you imagine selling naked Puts in SVXY or XIV, dear god. Even I’m not that stupid.

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