February 7, 2018 / 12:46 AM / 10 months ago

Shorting short volatility U.S. exchange trade products reaps big gains

Traders work on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., February 6, 2018. REUTERS/Brendan McDermid

NEW YORK (Reuters) - Monday’s slump in the U.S. stock market may have been painful for those betting against volatility in prices, but traders who took opposite positions hoping to gain from a sharp move are likely to laugh all the way to their banks.

Shorting volatility, or betting on calm stock market conditions, had been one of the most successful trading strategies until Monday, when a massive selloff in U.S. stocks derailed some popular short volatility exchange traded products (ETPs).

One trader’s pain, however, is another’s gain.

With short-volatility ETPs, such as VelocityShares Daily Inverse VIX Short-Term ETN XIV.P, the ProShares Short VIX Short-Term Futures ETF (SVXY.P), and VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV.O), all logging massive losses, traders who had bearish bets against these products have much to be happy about.

For traders who targeted these ETPs, their 2018 year-to-date paper profits rose by $639.4 million, to $1.03 billion, data from financial analytics firm S3 Partners showed, even though some of these bearish bets may have been hedges meant to offset positions held elsewhere.

“With the CBOE SPX Volatility Index .VIX almost tripling over the last three trading days mark-to-market profit and losses have been significant,” said Ihor Dusaniwsky, head of research at S3 Partners.

Dusaniwsky noted that with Credit Suisse (CSGN.S) announcing on Tuesday that it would terminate its XIV ETP fund, short sellers will have to buy back shares to cover their short positions on or before February 20th, the last day of trading for the product.

Dusaniwsky said this could lead to higher volatility for XIV over the next few days as traders look to buy XIV to cover their short position.

Reporting by Saqib Iqbal Ahmed

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