Shame on both the buyers and the sellers of volatility products


Well this is more fun now, isn’t it? I mean, aren’t we all just a little bit more excited about equity markets now that strange concept of a “two-way market” has been reintroduced for the first time since the market carnage in 2016?

Isn’t it great to finally see some of the most stupid and greediest among the investment community get a bloody nose?

Of course, this is the point where some “long-only” fool turns into a social media keyboard warrior and berates me for wanting people to lose money. In truth, the people I’m more than happy to see lose their money are the ones who throw it into products that they have no understanding of whatsoever.

The truth is most of us are “tourists” to a certain extent in most of the financial products we buy and sell. Very few investors have anywhere near the expertise to invest in half the stuff we put in our portfolios.

Who really has bought a bank stock knowing its full balance sheet?

Which emerging market exchange-traded fund buyers have really looked into the current account dynamics of the constituents of the basket? Not many, but at least we know what a bank is and roughly what they do. At least we can point on a map to where Malaysia and Indonesia are, can’t we?

So how great it was to see the buyers of inverse, leveraged volatility products absolutely getting wiped out on the market. For me, this was the ultimate definition of the dumb tourist blindly putting money on a greed trade.

How many buyers of these short volatility products actually know what the parameters – such as maximum loss and profit – look like on a graph?

How many ever looked at how the VIX is actually priced?

The answer is virtually none and they know it. All they saw was the income generated in a low volatility market.

Don’t get me wrong, I would love more people to be playing in the derivatives market. I think a well-constructed portfolio of option positions really can add huge amounts to a portfolio.

What really gets my goat is that supposedly low risk income generators have been constructed by snake oil salesmen to sell to gullible and greedy investors, without any real effort to educate as to what can go wrong in a two-way market.

Shame on both the buyers and the sellers of these instruments. And let’s not even go there on where the regulators were to protect these people yet again.

As I said, we are all tourists in most investments. It would be nice if just occasionally someone read the guide book first before stepping off the plane.

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