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.