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ProShares To Castrate Legless Survivor Of Short Vol. Blowup

Market war crimes are still crimes.
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Depending on your penchant for finding humor in the misery of idiots, the implosion of the short vol. doomsday ETPs on February 5 was laugh-out-loud funny.

The vix

Although he's apparently still proud of it (because you know, "all publicity is good publicity" when you used to work at the local Target), the New York Times piece published last August that made Seth Golden the poster child for retail investors shorting vol. literally from their living rooms was a clinic in journalistic condescension.

If you read that article (or re-read it, because it never gets old), it is obvious that the Times realized how terrible of an idea it is for big box managers to trade in their "Hi, my name is" tags for the short vol. trade. It's like your lawn guy deciding to ditch the Husqvarna for a new career building space shuttles in his garage.

The Times, bless their hearts, went out their way to cite a bunch of people who know exactly why it is a bad idea for retail investors to be in that trade, but they didn't have to. That is, you didn't need to understand the details because when you hear "former Target manager" and "short vol." in the same sentence, your spidey sense starts to tingle.

Of course it's not just retail investors who used those products and God knows it wasn't just retail investors who suffered during what's come to be known as "Volpocalypse" (Decca reportedly had a rough go of it and the losses incurred by the CTA crowd have been documented exhaustively).

But let's not pretend like we don't know why the retail crowd was mercilessly lampooned after XIV blew up and SVXY was nearly wiped out.

They were mercilessly lampooned because it's fucking hilarious to imagine the look on those people's faces when XIV plunged 80% AH on February 5 and they didn't understand why. And the reason that's hilarious is because had those people read the prospectus they would have known exactly why, so it's not like this was some injustice foisted upon them against their will. Rather, a lot of those people never understood what they were doing even when they were given ample warning to at least try and develop a basic understanding not only of the trade, but of the products they were using to put it on.

But morons aren't easily deterred, which is why people started piling right back into SVXY after the the most violent vol. spike in history. See unlike XIV, SVXY survived the vol. explosion - barely. It too collapsed some 90% in AH trading on February 5, but managed to drag itself out of the wreckage like someone who's just had their legs blown off and is using their arms to pull themselves along the blood-soaked pavement while onlookers vomit from the sight of the mayhem.

What the retail investors who have piled back into the short vol. trade via SVXY don't seem to understand is that it's not just going to skyrocket back to $140 as the VIX snaps back lower. That's not how this works. Some of these strategies are permanently impaired. That's what happens when you get your legs blown off. They don't just grow back as long as you don't step on another land mine.

Well as if this story needed to get any funnier, ProShares has now changed the "objectives" on SVXY effective February 27 (so as of later today).

Basically, they're reducing the leverage. Here's what the press release says:

ProShares Short VIX Short-Term Futures ETF (NYSE Arca: SVXY) will change its investment objective to seek results (before fees and expenses) that correspond to one-half the inverse (-0.5x) of the Index for a single day. The Fund's investment objective currently is to seek results (before fees and expenses) that correspond to the inverse (-1x) of the Index for a single day. If the Fund were successful in meeting its new objective, on a day the Index fell 1%, the Fund should rise approximately 0.5%, before fees and expenses. Similarly, on a day the Index rose 1%, the Fund should fall approximately 0.5%, before fees and expenses.

They're also changing the rules on UVXY, which is the levered long product.

Of course you can't just make these changes out of the blue and not expect it to affect people. This is likely to have all manner of implications for all types of investors. Here's what Athanassios Diplas, principal at Diplas Advisors LLC told Bloomberg:

Buyers of either calls or puts have paid premia that were based on much higher implied volatility values than will be prevailing post the proposed changes. Similarly, anyone directly trading these two ETPs, either long or short, whether for hedging or direct investment, will have to adjust their exposures, and incur the associated costs of rebalancing.

The point here - obviously - is to reduce the risk of an implosion and probably also to avoid a scenario where the rebalance risk from inverse and levered VIX products ends up getting large enough to catalyze another anomalous VIX spike.

And while that's all fine and good, I think it's entirely fair to suggest that this is just another example of at least some people getting screwed by dabbling in these products because again, this is going to force people to make adjustments.

Whatever the case, SVXY and UVXY are basically castrating themselves tonight which means that SVXY has lost its legs and its balls (figuratively speaking) in the space of just three weeks.



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