- via the WSJ's Ben Eisen
- According to a paper from two University of Texas researchers, a quirk leaves the volatility market vulnerable to a sophisticated trade involving pushing around the prices of underlying S&P 500 options in order to manipulate the value of VIX derivatives as they settle.
- "This market is fairly unique because you’ve got a very liquid market that’s settling based on the price of a less liquid options market,” says one of the authors.
- A hypothetical example: A trader long $2M of VIX futures, wanting to push prices higher prior to settlement, could spend $1M overpaying for S&P 500 options at the settlement auction, driving up the price of the contracts used to calculate the VIX. Any money lost on the S&P options trade would be gained doubly by the VIX derivatives (where twice as much are owned).
- The CBOE says the work is based on "fundamental misunderstandings."
- ETFs: VXX, UVXY, TVIX, XIV, SVXY, VIXY, ZIV, VXZ, VIXM, CVOL, VIIX, XVZ, XXV, TVIZ, IVOP, VIIZ, VMAX, VMIN
- Now read: VXX: Capitalize On A Possible Surge In Volatility
Original article