Do you recall the evil of the market back in early February? You know, those evil folks that caused the market to crash known as the “short-Vol/VIX traders”. CNBC's Mad Money Host Jim Cramer penned an article only a couple days after the February 5thVolpocolypse titled “Jim Cramer: There Are 4 Real Culprits for This Stock Market Nightmare”. In the article, Cramer declared the 1,000+ point declines in the Dow and 3-5% drops in the major averages as being caused, in part, by short-VOL traders.
“These instruments are the proximate cause of the madness you are now seeing. Consider them a nuclear blast zone and the fallout is raining on the S&P 500 causing radiation sickness that's threatening to take the market down much further than it already has.”
Those are pretty damning words used by the infamous Mad Money host and founding operator of TheStreet.com. In a very miniscule and finite way, I'm sure the short-VIX crowd had something to do with the exacerbated 3 to 4-day market correction, but to the extent that Cramer layered and laid into VIX traders for the next month, it was highly unwarranted and illogically disconnected. (Now that's layering)
“A group of complete morons” who traded little-known, leveraged products that bet on volatility is “blowing up” everything, Cramer said on “Squawk on the Street.”
A group of complete morons huh? Me thinks Jim Cramer simply doesn't know all there is to know about the VIX, the Volatility complex that includes many derivative structures or the correlations that make shorting volatility a virtual certainty. Understand that when I say “virtual certainty” I'm defining the verbiage by correlation or correlations. If you believe in the existence of the equity market, you believe in benign volatility in the equity market long-term. Markets simply can't exist in a state of perpetually increasing volatility or a perpetually rising VIX. Investors would flee the market in droves, never to return, as the environment would seem too perilous to participate. Such a fact of psychology doesn't even begin to brush the surface surrounding why certain VIX-ETPs decay in price over time.
In 2018, we are seeing very scant market volume activity. This is largely due to the massive increase in volatility/VIX when compared to last year. April saw the lowest trading volumes of the year after the markets found their first correction in nearly 2 years. The average reading on the VIX last year was just above 11, but during February it rose to just above 50 at one point. Mind you, this would have been the most perfect time to short volatility, but for the sake of Cramer's castigating of the morons… Through much of March and early April the VIX managed to level out around 19, which is the historic median reading of the VIX, give or take a few percent. My point in describing the 2018 increased levels of volatility is simply to validate the statement that investors would flee volatile markets and shorting volatility is a virtual certainty. So even as CNBC's Mad Money hosts blubbers on about the short-VOL traders, to this day, CNBC itself published the following in mid-April:
