Publications: Notes at the Margin

Blame the VIX (February 12, 2018)


Last week, those who had written puts on the VIX, died by the VIX. The VIX is an option traded on the Chicago Board of Options Exchange (CBOE). The VIX is a volatility index designed by the exchange’s economists. It is popular. At the end of January, open interest in VIX futures was six hundred thirty thousand contracts. The price was around $14. Friday, the price had increased to $42. The contract’s value changes by one thousand dollars for each dollar move in price. The change in the contract value—and the margin call—was around $18 billion dollars.


A margin call of $18 billion will get the attention of traders and require action. One step is to sell other assets. As experienced traders would explain, you sell what you can, not what you want. Oil futures were one of the commodities sold. Apparently, the VIX price rise caused traders who were long oil and short VIX to sell positions in the oil futures market. This started the cascade. Falling oil prices led to margin calls for other traders who were long oil futures. The calls led to sales, pushing prices down further. It was a classic market liquidation. This week's report provides the details.


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