EACH morning, at the market’s open, Seth M. Golden, a former logistics manager at a Target store, fires up the computer in his home office in northern Florida and does what he has done for years: Put on bets that Wall Street’s index of volatility, the VIX, will keep falling.
It has been a lucrative strategy as the fear gauge has been, outside of the occasional spike, largely fearless—confounding experts by sloping persistently downward and in the process making Golden a multimillionaire.
“There has been a lot of white noise,” Golden said recently on a day that the VIX plummeted more than 10%, allowing him to lock in profits from short trades. “You had North Korea, Afghanistan, Trump people resigning. But I was never nervous—so today I just sat back, ate some popcorn and cashed in my profits.”
Twenty years ago, when the shares of dot-com and tech companies soared and swooned, investors loading up on hot tech stocks would define the speculative fever of that era. Across the country, people quit their day jobs to trade the likes of Webvan and eToys from their living rooms or glittery new E-Trade outlets.
Now, a new generation of day traders, deploying an expanding array of opaque, high-risk, high-return trading vehicles concocted by Wall Street, are pouring into one of the market’s most arcane corners, making bets on whether the VIX—otherwise known as the Chicago Board Options Exchange Volatility Index—will rise or fall.
Wagering on the fear gauge, a measure of how volatile investors expect stock markets to be in the month ahead, has traditionally been the province of highly specialized investors with the cash and financial relationships to purchase the derivatives that facilitate these trades.
In the years after the financial crisis, however, investment banks like Barclays and Credit Suisse came out with VIX-linked investments that investors could purchase on the stock exchange, just as if they were buying shares of IBM or Microsoft.
Called exchange traded notes, they were a racier version of the exchange traded funds, or ETFs, that track every variety of index and investment strategy and now have more than $4 trillion in investor assets.
Led by Barclays iPath S&P 500 Short Term Futures ETN (VXX), these investments have attracted more than $14 billion in investor flows since 2012, according to FactSet, a data-gathering firm.
There are now more than 30 different VIX-themed investment choices (including some that use leverage, amplifying gains and losses) that investors can snap up on a public exchange.
Because they are so easy to trade and because the question driving the trade—Will the markets succumb to fear or won’t they?—borders on the existential, a new wave of millennial day traders has been at the forefront of this trade.
And many are using Stock Twits, the social media investing website embraced by stay-at-home investors, as well as Twitter and Facebook to passionately promote their strategies.
“You could describe it as a cult—it is about how you define and measure fear and can you trade it,” said David Moadel, an independent trader who uses social media to identify and interview emerging investors.
But this explosion in interest is prompting concerns that investors may not be truly aware of what they are getting into.
Today, VIX-themed entities are among the most actively traded securities on the public stock markets. The Barclays iPath note, Ultra VIX Short Term Futures (UVXY) by Pro Shares, and Daily 2X VIX ETN (TVIX) and Daily Inverse VIX ETN (XIV), both by Velocity Shares, are frequently among the most widely traded stocks of the day.
In theory, the murky nomenclature of these investments ought to be warning enough for amateur investors to tread with caution. And it is also true that the fund prospectuses warn bluntly that investors can lose large sums of money if they buy and hold these investments.
Robert E. Whaley, a financial professor at Vanderbilt University, who is known in volatility circles as the “father of the VIX,” says he has told the Securities and Exchange Commission that these securities are too risky for many nonprofessional investors.
© 2017 The New York Times
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