Innoware's Blog - Is the Volatility Trade being “Manipulated”?
I just sent out a blog on why I have multiple brokerage accounts. And then immediately continued with a second blog this Saturday, January 27.
Why I have become passionate about putting my thoughts on paper? First, it helps me in my trading. Second, it keeps me busy!!
I write this blog because many stocktwits users messaged in past 3 days asking me to explain the strange VIX, SPX, UVXY price action. And I thought, why not cover this in the form of a blog!
Is the Volatility Trade being “Manipulated”?
We have long heard UVXY longs (or should I say Volatility longs) cry publicly on stocktwits and other forums that the market is fixed, UVXY is fraud, the deck is stacked against them etc. etc. My comment to them has always been - do you due diligence and please do your self a favor by reading the prospectus or understanding how these VIX based ETPs/ETNs work.
You can download a copy of my eBook which I wrote with Brennan Nykreim, and which is available for FREE download from our website
to learn more about these instruments. Or send an email with your postal address to info@TradingVolatility.info and it would be my pleasure to send you a printed signed copy of our book.
The past week’s action on indexes (specially) VIX, SPX and UVXY price (along with other volatility tickers like TVIX, VXX, SVXY and XIV) has made me come to a firm belief that M1 and M2 (the current month and the next month VIX futures) can be controlled and thereby a deep pocket investor / investors can really fix / manipulate / control the volatility trade.
I know this blog post will raise a lot of eyebrows. I welcome any decent / logical / intelligent response to this blog post of mine.
First let me clarify. I am not accusing any body of fraud or manipulation!! All I am saying is last week (or shall I say past 10 days), at the back end, the Volatility Trade has been controlled. And that too very beautifully!! Well, the system is designed that way and they (whom so ever they might be) have been pretty successful in their efforts.
Last week’s price action
On Thursday, January 25, 2018, SPX rose, spot VIX rose and UVXY rose.
On Friday, January 26 2018, SPX rose big, spot VIX fell and UVXY rose.
Intriguing, correct? Not really!!
My Trading Volatility book summary in 3 bullet points
If you had no time to read my 131 page book, no worries. I will summarize Trading Volatility in 3 sentences
• UVXY Price does not depends on spot VIX
• Instead, UVXY price depends on M1 (current month VIX futures) and M2 (next month VIX futures)
• As long as VIX futures graph (available at http://VixCentral.com) has an upward rising slope, UVXY price will fall long term
How UVXY Price was controlled
So, what happened last week was indexes rose. This resulted in more folks buying SPX puts for protection. This raised spot VIX. Perfectly understandable. The free market is in play.
The thing to remember is M1 and M2 mirror spot VIX’s price movement. But this is not a guarantee. When spot VIX rises, M1 and/or M2 can rise. But as spot VIX rises further, M1 and/or M2 can fall too.
In the past, enough times we have seen that as SPX rose and spot VIX rose, M1 and M2 have fallen, thereby UVXY free falling and we seeing a volatility crush (And that time the Volatility longs would come out and say UVXY is a fraud).
Here is my thesis on this “controlling the volatility trade” thesis:
Step # 1
Last week, some one / many with deep pockets controlled M1 and M2 by buying as many M1 and M2 anyone was willing to sell to them at higher prices. I don’t have the data, but if at all some one were to control this, they would need deep pockets. I don’t have any data on how much was spent on these trades but I would welcome any input here. My thesis is no doubt this would involve huge money. But the investment here will be comparably less as compared to what would be earned in Step # 2.
Step # 2
Next, the same group can heavily long UVXY, TVIX, VXX and short SVXY and XIV. Note that the volume on these tickers is way above the step # 1. Again, I don’t have any data on this and if anybody wants to share the dollar value, you can reach me.
With the above, a lot has been achieved
• The spot VIX which was in 9/10 range has risen to 11/12 range. Of course, this was not controlled and was a natural and fair action
• Ensure that inspite of huge SPX rise, UVXY still trades at $10.
• Invest a less amount of money to prop up M1 and M2
• Rake in much larger profits by being long UVXY/TVIX and short SVXY/XIV
Am I accusing anyone of fraud / manipulation / criminal conduct?
No. All I am saying is the VIX system is designed this way. While SPX put buying defines spot VIX, M1 and M2 are just traded. And they find a balance and a price based on buyers and sellers. Only on the Tuesday in the middle of the month (February 13th, 2018 in our case), will the spot VIX and M1 converge.
So, this is the system in place. And if it was used, I think it is fair game.
Finally, will UVXY see a price fall and if yes when?
I will again go to the 1 line summary of my book. As long as the VIX futures graph has a rising slope, UVXY price will fall. When? No one can predict.
Maybe, those who are holding M1, and M2 price at a higher level, once they let it go, UVXY will have a free fall and we will see a $8 UVXY then.
This blog is neither an investment advice nor an accusation at any one or a group of stock market players. All I am doing here is to state a thesis that UVXY price is solely dependent on M1 and M2 and if one were to control M1/M2, one indeed can control the price of the volatility Tickers. But is this that easy to accomplish? In my personal opinion, it is not difficult at all!!
Remember, UVXY has fallen from $41 million dollars to $10 in seven years. So, like death and taxes, no one can prevent UVXY price fall. Because it is designed that way. Its is only a matter of time!!
The material contained in this blog is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. As an investor, you are fully responsible for any investment decision that you make.