How Shorting the VIX Blew Up the Market, and Why It Could Again

If you didn't know what the Chicago Board of Options Exchange Volatility Index (VIX) is, you almost certainly do now after the correction. Plenty of regular investors don't realize how the VIX works, though - what makes it move up, down, and sideways. You can't trade the VIX directly - it's a mathematical calculation, after all. But a whole buffet of easy-to-trade, not-so-easy-to-understand exchange-traded products (ETPs) makes it possible for anyone - mom-and-pop retail investors, institutional traders, risk parity funds, and newly minted hedge funds - to bet on the VIX moving up, down, and sideways. These folks saw the VIX doing a whole lot of nothing for more than a year and bet accordingly, to the tune of tens of billions of dollars. And for a time... it was good (notice I didn't say "smart"). But earlier this month, when human and silicon investors and traders got spooked, the VIX spiked - spiked like never before, in fact - jamming an ugly, red-hot poker into that great big, happy, feel-good short volatility bubble. All the investors and traders out there who spent a year or more picking up pennies in front of a double-decker bus got killed when their favorite ETPs blew up. What happened after that... well, we're still dealing with it and could be for some time. The market's trying for a run higher from here. It's already pared about half its losses from the depths of the correction, but the road isn't as smooth as it was just four weeks ago. Amazingly, the trade that started this whole mess is still out there. Sure, a few high-profile short volatility vehicles imploded, but it's still very possible for this to happen all over again. Here's how... Tags: market correction To get full access to all Money Morning content, click here About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free . Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors. Disclaimer: © 2018 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201. The post How Shorting the VIX Blew Up the Market, and Why It Could Again appeared first on Money Morning - We Make Investing Profitable .