How One Of The Most Profitable Trades Of The Last Few Years Blew Up In A Single Day

Tracy Alloway (0:09)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, I'm so excited. This is totally my topic, and I'm so, so excited that we're going to be discussing it for at least like 20 or 30 minutes.

Joe Weisenthal (0:26)

I like how you pretend that we never talk about anything that you like. You know, if you wanted to, you could contribute more and suggest more guests if it was really that skewed towards things I liked.

Tracy Alloway (0:38)

Okay, okay, I'm exaggerating a little bit. But the reason I'm so excited is we're first of all going to talk about something that we have talked about on this show before in what was an excellent episode.

But secondly, we're going to talk about something that I've been writing about for years. And actually a lot of other financial journalists and financial analysts have been writing about the same thing. And then earlier this month, it all happened. Everything that people had been talking about saying might happen for years actually happened. And it was a huge, huge event in the market.

Joe Weisenthal (1:14)

A, it's kind of rare for us as a podcast to actually be talking about something that's very timely. We're usually a little more off the news, so I'm excited about that.

Tracy Alloway (1:23)

True.

Joe Weisenthal (1:23)

But what's even rarer is for something bad to happen that financial journalists actually predicted because we're usually pretty bad at that.

Tracy Alloway (1:31)

Now, now, financial journalists are your friends and colleagues, so you should be nice to them.

Joe Weisenthal (1:37)

Financial journalists are good at calling 10 out of the last two crashes, as they say.

Tracy Alloway (1:42)

All right. Well, on that note, let me set the scene.

So what I'm talking about is something that has been since dubbed the volpocalypse, this big spike in volatility that we saw in early February. We had a selloff in stocks and then we had a spike in something called the volatility index known as the VIX. Some people refer to it as Wall Street's fear gauge. Some people feel very strongly that it shouldn't be called that. And then as the VIX was spiking, we had two products that were tied to the index that encountered a tremendous amount of pain. One of them basically died that day and the other one is sort of limping onwards. And just before we start the show, I'm going to throw out the full names of both products so that people know exactly what we're talking about. The first one is the ProShares Short VIX Short Term Futures ETF called the SVXY. And the second one, the one that actually died, is called the VelocityShares Daily Inverse VIX Short Term ETN.

Say that two times fast. That one is known as the XIV.

Joe Weisenthal (2:52)

I am very excited about this conversation because as we've talked about, A, we talked about the short volatility trade on the show with the guests that we're about to talk to. So this is a follow up. It's a story and then conclusion.

And B, the backdrop to many of our episodes has been, it's like, Tracy, there's not much going on in the markets these days. It's low volatility.

So this really has everything for us and I'm excited to get started.

Tracy Alloway (3:16)

Yeah. Finally, we can say that something happened in the markets.

So, without further ado, then, let's bring on our guest. He is, of course, Pravit Chintawongvanich. He is head of Derivatives Strategy over at Macro Risk Advisors and he has been writing about this for years. Pravit, thank you so much for coming on. I know you've had a busy week.

Pravit Chintawongvanich (3:36)

Thanks for having me.

Tracy Alloway (3:38)

So maybe just to begin with, shall we do a quick recap of what exactly the short volatility trade was?

Pravit Chintawongvanich (3:47)

So, I notice you used the past tense. I don't think it's over yet for what it's worth. But the short volatility trade, you know, so these two products that you just mentioned, XIV and Svixi, they're just really two expressions of the short volatility trade. But more broadly, what does it mean to be short volatility?

Honestly, it depends on who you ask. So if you ask someone like, you know, Chris Cole over at Artemis, he'd tell you that, well, almost all forms of risk-taking are short volatility, and I kind of agree with that view of the world in the sense that, okay, if you're long equities or you're long, you know, high yield credits, I mean, you're kind of short vol, right? But let me dive into what most people are the kind of the more narrower, more common definition of short vol.