TLDR; I believe that the VIX and the contracts that govern its effectiveness for use as a hedge have been manipulated into suppression. However, I believe we are about to reach a critical turning point in which the rusted gears begin turning again
VIX-traded products are not all that they seem (and many investors already know this). When you buy into products like $VXX and $VIXY, you are not directly buying into the price of the VIX index, but into a basket of funds that are designed to track futures and derivatives pricing.
Ultimately, these products are driven by PUT-CALL ratios, meaning that when volatility within these products increases, a compounding effect occurs that further exacerbates moves of the VIX. This REQUIRES THE USE OF THE VIX AS A HEDGE PRODUCT. With so many other products in the market being promoted as hedges against market collapses (ie ETFs, Hedged downside basket funds, etc.) VIX-related products appear as if they are no longer the “kings” of hedges. Historically, when the market falls suddenly the VIX spikes. So why is this not happening during the enormous swings in prices we are seeing today and is it dead?
The simple answer is no. It is absolutely not dead, but it has been beaten down by expectations.
The FED is attempting to act proactively to prevent a collapse within the market, and investors are buying into this narrative. The current market is reflecting confidence that what is coming will be bad but not catastrophic.
Firms love buying into the narrative because it offers justification to buy more products that ensure investors that they are still capable of utilizing funds to generate profits. After all, who would want to invest with a firm that refuses to provide any risk in the hopes of generating potential gains for its consumers? That’s no fun.
There have been subtle signs over the past year that corroborate the idea that there is a sleeping giant who is being poked repeatedly by the FED and investors. Firms that create VIX products have a better understanding of this than anyone else. For example, back in March Barclay’s suspended the creation of new notes of its VXX product, decoupling it from its underlying. There could be a wide range of reasons for this, but I believe that the VIX analysts viewed future market conditions as being so volatile that the losses incurred on the product would exceed the amount of cash on hand to cover the trades made.
Below is also a historical chart of how the VIX operates in relation to the S&P 500.
As you can see, a notable peak can be seen, similar to that of 2020 (Which I understand was an odd year with unprecedented market conditions). However, I will also include a volatility-of-volatility chart to exemplify current volatility pricing.
Vol-of-Vol represents the demand for VIX calls, and it is plummeting. At some point in the near future, I expect a floor to be hit and the trend to reverse. DRAMATICALLY. As other hedges prove inefficient or unsustainable, I believe that firms will fall back to the most reliable historic hedge in modern times. This will begin the Gamma reversal that is to be expected in this type of environment. Not necessarily by shorts, but by options traders, or lack thereof by PUT traders. As calls flood in, I expect $VIXY to profit the most.
The VIX is undervalued at its current price as the market seems to maintain the “everything is priced in” mindset. However, market crashes are rarely ever predictable events, as they rely on shady, uninformed, or straight-up illegal trading methods. Firms, banks, and companies are attempting to remain profitable at any cost, and I believe the ultimate price will be the solvency of the market (at least for a brief period of time). This brief period of time, however, is exactly where the VIX excels.
I am long $VIXY, but as of writing this on 07/26/2022, I do not hold any options on this product. I do not have access to information necessary to determine dates, and times, or have been able to find useful financial statistics that would provide damning evidence of fraud, or which aspect of the market it is prevalent in. I am confident that fraud is permeating the entirety of the market though, and taking my long position in $VIXY, I am accumulating positions for the event I am sure will happen in the near term.
These products are EXTREMELY volatile and can subject their investors to drastic losses.
Do your own research and analysis. Trust your gut. Good luck.
Contributor Chuck Saletta The Motley Fool. (n.d.). What is a gamma squeeze? Nasdaq. Retrieved July
26, 2022, from www.nasdaq.com/articles/what-is-a-gamma-squeeze-2021-01-28
The Last Bear Standing. (2022, May 27). The volatility squeeze: Part 3. The Volatility Squeeze: Part 3.
Retrieved July 26, 2022, from thelastbearstanding.substack.com/p/the-volatility- squeeze-
Schwab.com. (n.d.). Vix etfs: The Facts and Risks. Schwab Brokerage. Retrieved July 26, 2022, from
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do your own due diligence or consult your financial professional before making any investment decision.
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