Ok, I admit it. Guilty as charged, dammit. I was a little hard on Seth Golden, the former (and probably future) manager at a local Target who quit his job to become a full-time vol. seller from his living room in Ocala, Florida.
Seth became the poster child for the retail short vol. trade when he inexplicably agreed to be profiled in an extremely unfortunate piece that appeared in the New York Times on August 28, 2017. Seth – and a lot of folks like him – were able to log triple-digit returns shorting the VIX via a collection of doomsday ETPs that probably unbeknownst to them, were embedding a serious amount of systemic risk into markets.
The problem, which the vast majority of people trying to pick up the pieces after Monday’s epic blow up still don’t understand, is that levered and inverse VIX ETPs were becoming a larger and larger part of the market and the rebalance risk inherent in their vega-to-buy on a given vol. spike became large enough that it had the potential to turbocharge a sudden move higher in volatility. And that’s exactly what happened on Monday.
So that was the problem for the market, but the problem for Seth and his ilk was that thanks to provisions they most likely didn’t care to read, some of those products had what amount to knock-out clauses that allowed the issuer to simply redeem those fuckers in the event things went too wrong, too fast.
After the bell on Monday – following a 100%+ spike in the VIX – that risk was realized when XIV fell 80%. Our immediate reaction while myriad Seths were panicking on social media was this:
Hey guys? It looks like XIV is done.
On Tuesday morning, the black swan landed – Credit Suisse pulled the plug. It reopened, but it’s over:
And it wasn’t just XIV. There were other casualties. To be clear, this wasn’t difficult to see coming and neither was the knock-on risk for markets. Back in early January, Goldman warned that just a 3-point spike in VIX futures would force VIX ETP issuers to buy $110mm vega. That, the bank’s Rocky Fishman said with some alarm, was “double the highest ever seen before 2017” and represented “~60% of daily 1st/2nd VIX futures volume, and around 30% of open interest.”
Well over the past 24 hours we’ve spent an inordinate amount of time making Target manager jokes while helping everyone else piece together what happened. You can read two of the postmortems here and here and if you want some Seth jokes, see here and here.
On Wednesday, Seth is back in the New York Times, and not a moment too soon. Actually, it’s a moment too late. And for all of those readers who patiently tried to explain to me that Golden was long vol. by the time Monday rolled around and didn’t feel the pain, Seth says you’re wrong. To wit:
“People are scared out of their minds – they are in really rough shape,” said Seth Golden.
Profiled in The New York Times last summer, Mr. Golden exemplifies, perhaps in a cautionary way, how easy it has become to gamble on whether volatility in the stock market will be high or low.
Mr. Golden’s preferred vehicles are the iPath S&P 500 VIX Short Term Futures and ProShares Ultra VIX Short-Term Futures, which he has been betting against for years in trades that have been lucrative – until now.
After VIX shot up 100 percent, the largest move in its history, to 35.73 on Monday, Mr. Golden acknowledged that he was feeling some pain.
Yes, good ol’ Seth was “feeling some pain”. And by that he means this:
“It is really stressful,” he said. “I was up until the wee hours, checking my phone to see where VIX futures were trading.”
And now… drumroll please… he’s doubling down:
Nonetheless, he said on Tuesday that he was still wagering 21 percent of his portfolio, or $600,000, that volatility would fall as it had in the past.
#PrayforSeth
It seems that Seth’s 12m portfolio suddenly shrunk to 3m. That still should be enough to buy a decent computer.
i will stay a little hedged–long vixx 1/5 position.
i did BTFD–Uff.
Mr Heisenberg,
You have a lot of fun suggesting Seth will end up back at Target ( if they will take him) but the post indicates he still has a portfolio of $3 Million of which he has wagered $600k on a continued vix decline. Depending on where he entered the short vix trade on Tuesday, he was highly likely to be profitable by Wednesday and perhaps even by Friday if he was still in the trade. Historically vix does not stay above 30 for long, but even if he loses the $600k completely, he will be left enough to “go fishing” for the rest of his life in reasonable comfort if he should so choose. So perhaps your disparagements of him are premature.
Having said this, I much enjoy your commentary and usually find it to be educational and enlightening
AlorChip, that’s not how short selling works. You can lose more than your initial investment.
Yes, I know that and if Vix goes back up and if he is pig headed and remains in the trade, or even if it spikes up again too quickly for him to close his position, he may lose more than his new position very quickly, maybe a lot more. But so far vix is declining, down almost 12% today and so I suspect he is probably profitable. It is too early for Mr. Heisenberg to send him back to Target. Even if he loses twice his new investment he is still left with a nice nest egg for most people. But he certainly needs to know “when to fold em.”
I think your articles are great, but I think this is pretty condescending towards small retail traders who’re trying to grow their accounts. The guy made a killing off the short vol trade, and deserves some credit for that. Most small retail plebs are buying AAPL and holding it in the hope that it keeps mooning. Absent insider information, the only way you can really make bank is by taking inordinate amount of risk on the right trades.
Yeah, well, that doesn’t make it any less funny. What you’ll discover in these pages is that no one is immune from mockery – I mock myself all the time, for instance. So if I’m going to make fun of myself on my own site, then I don’t know what makes you think anyone else is off limits.