"The VIX Finally Went Bananas": Morgan Stanley's Post Mortem Of Everything That Happened

Last July, Morgan Stanley's Chris Metli, executive director of the bank's institutional equity division, wrote an article - posted here - looking at what would happen "if the VIX goes bananas" which previewed yesterday's results with eerie accuracy.

And, a little over six months later, the VIX did finally go bananas. Here is Metli's Post Mortem of what happened.

Post Mortem

by Chris Metli of Morgan Stanley

With a 4% drop in cash equities and even greater decline in futures, the VIX finally went bananas rising 20 points to the highest level since Aug 2015, and the weighted average 1-month VIX futures rose 96%.  This creates more supply from systematic funds for the rest of the week and nearly bankrupted the inverse VIX ETPs with NAVs down 96%.  To summarize the price action and implications:

  • Some of the selling on Monday likely reflected investors anticipating systematic supply on Tuesday – this means the $30 to $35bn QDS estimates for sale Tuesday (detailed below) may net down to $15 to $25bn.  This is still enough to have negative impact on markets though and will be compounded by dealer short gamma positions.
  • Anticipation of further supply later in the week from both annuities and risk parity funds could bring in more fast money sellers Tuesday.
  • The near bankruptcy of the inverse VIX ETPs will be a very negative headline, and the several billion dollar loss for holders, largely retail, will scare some out of the market or force liquidations of other products to raise cash.
  • Institutional vol sellers will likely cover exposures as well in the coming days and weeks.  While these positions will not take losses on the same scale of the VIX ETPs (because they are generally scaled more conservatively) unless there is a quick snap back many investors will likely take down risk, supporting implied volatility in the process.
  • On the positive side, much of the short gamma exposure in the VIX market has been wiped out, leaving less risk of a further volatility spike from here.
  • Investors were not in panic mode despite the selloff, as this move has ‘only’ wiped out one month of P/L.  As noted earlier in one sense this is good as it might slow discretionary supply, but it also highlights that discretionary investors are still very long risk and could easily turn sellers.
  • Who are the incremental buyers here?  Macro funds betting on the vol unwind that has now happened could cover and turn buyers, but for real support the market needs deep pocket asset allocators to step in.  Vol target supply will eventually wane as volatility peaks and/or leverage comes down, but they likely remain sellers for the next several days.
  • Net-net: more supply likely pushes markets lower Tuesday and potentially Wednesday, and buyers will need to see signs of slowing supply and stabilization to come back in.  Short-dated implied volatility has likely peaked, while the back end of the vol curve likely rises over the next week and realized volatility will continue to move higher.  This is unlikely the turn of the cycle as the selloff is largely technical and positioning driven, and likely not large enough to feed back into the real economy and become fundamental, so dips will be bought after the systematic supply and vol unwinds abate.

QDS came into Monday expecting nearly $5 to $10bn of equity supply from systematic funds, principally annuities as they tend to react quickest to recent increases in realized volatility.  That supply likely contributed to the move lower, but it was then compounded by dealers having to hedge their short gamma exposures.  QDS estimates that in total dealers likely had to sell $11bn of S&P 500 futures on the way down today.

The selling was exacerbated by a lack of liquidity – as the MS Futures team has noted, available size in ES futures has been deteriorating this year (left chart below) and it dried up sharply Monday afternoon with average available size at the top of the book falling to ~75 contracts between 3:30 and 4:00 pm versus typical levels between 500 and 1000 seen last year.

After this violent move lower, QDS estimates that annuity funds will now need to sell between $30 and $35 bn of equities on Tuesday, and a similar amount Wednesday.  Realized volatility has moved through most funds’ target ranges, so this is the point of max pain, but further volatility from here could still add to the supply picture for later in the week.

As noted in previous pieces, risk parity funds were likely not sellers yet.  But that is now at risk of changing since despite the rally in bonds today, it was likely overwhelmed by the selloff in equities, and realized volatility for risk parity portfolios is now starting to rise.  Timing and sizing this flow is not as clear as for annuity funds, but if the actual deleveraging follows QDS models, there could be $10 to $20bn of supply in both equities and bonds later this week.  The flight to safety in bonds will certainly help slow any deleveraging and keeps the tail scenario of stocks and bonds falling together off the table, but near-term they could still be modest sellers given the increases in volatility across asset classes.


The VIX market saw the net buying pressure on record.  For background on the risks that materialized Monday see If the VIX Goes Bananas, this is What it Might Look Like from July 2017.  Details and implications:

  • The ETPs had to buy 282,000 VIX futures to rebalance their short gamma… needless to say this is the largest VIX buy in history, dwarfing Friday’s previous record of 78,000.  Dealers hedging their short gamma exposures likely contributed to VIX futures demand as well.
  • Most of the rally in VIX futures happened after the 4:00 pm cash close, not leaving a lot of time for investors or the issuers of the VIX ETPs to react.
  • This move was incredible particularly because VIX and VIX futures were already elevated – and the amount of volatility to buy exceeded QDS estimates (below shows what QDS estimated coming into Monday) and speaks to the size of the short vol exposures in the market:

  • Whether the inverse ETPs continue to exist tomorrow is up for debate at time of this writing (contact us for details), but for the broader market the implication is clear:  the inverse ETPs have effectively delevered down to zero, going from short 230,000 VIX futures to short just 4,000.  (note exact numbers will need to be updated to reflect creations / redemptions reported overnight).
  • On a positive note this means there is much less risk going forward of further vol to buy from rebalancing of these products.   On a negative note holders of the inverse ETPs lost $3.4bn as the products went nearly bankrupt and this removes a steady source of volatility supply over the last year.

The VIX move of 20 was massive relative to the SPX selloff of 4%, pushing the rolling 1-month beta of VIX to SPX to all-time highs.  Prior to 4pm the VIX futures move had been relatively modest versus the move in VIX, but that rapidly changed post close as VIX futures rallied nearly 80% as much as VIX spot – a rare occurrence as the ratio is usually 40-50% – as the massive 280k futures that had to be bought had an impact.

Prior to the VIX futures explosion post cash close, the bid to the front of the term structure and massive steepening of skew was reflective of the pain dealers likely felt from the move lower in spot, forcing them to cover their short vol positions with short dated options (impacting VIX more than longer-dated vols) – as noted previously skew was too flat given the large short downside vol exposures dealers were sitting on.  Demand to cover short convexity risks also drove VVIX (the implied volatility of VIX to a record high of 177%, outpacing even the large move in VIX.

Even though Feb and March VIX futures caught up late day, longer-dated VIX futures lagged and June VIX futures are actually still trading below 10 year medians.  This is typical behavior in a sharp selloff – the cheapest dollar price / shorter dated options get bid first, and only after investors begin to expect the higher vol environment to persist for longer do they buy longer-dated options to hedge.    Given that today’s move up in vol and skew was led more by dealers repricing risk than end user demand for puts, longer-dated volatility should reprice higher in the coming days.  Shorter-dated vols are already off their closing levels, retracing some of the post cash close bid.


GooseShtepping Moron Lost in translation Tue, 02/06/2018 - 10:10 Permalink

The VIX is calculated from the price of S&P 500 options. Specifically, all out of the money calls and puts for both the front month and the second month. In theory, this let's you know the "implied volatility" of the market over the next 30 days, i.e. how far the market will have to move up or down in order to square with the spot price of the market on the the options' expiry day.

The VIX is only an index value and not an actual asset in itself. It is just a measure of volatility. In order to trade the VIX, investors will need to buy an ETF that tracks its performance. It is also possible to trade VIX futures contracts directly. These are all derivatives, i.e. bets placed on the performance of something else.

In reply to by Lost in translation

Hillarys Server Evan Wilson Tue, 02/06/2018 - 08:41 Permalink

Hilarious clip, thanks!

A certain bank, I'll call it WF to not give it away, tried to do this to me.

They said they'd put my life's savings in a retirement account which allocates my savings into 30 equity sectors, health, technology, transport and so on, which represent the entire economy.

Each of the 30 sectors is a separate managed equity fund.

And they'd be reallocating constantly.

So every day, or whenever, they'd sell my health fund and buy a technology fund and the next day a transportation fund and then an agriculture fund. Just swishing from fund to fund to fund forever and ever without end.

So I said, "Who pays the fund fees each time you do that?"

No answer.

I ran for the hills.

In reply to by Evan Wilson

Endgame Napoleon TheWholeYearInn Tue, 02/06/2018 - 09:05 Permalink

Well, a few people get wildly rich, and since they have children, it is for the good of children. Then we have our womb-productive citizen / noncitizen serfs at the bottom. You can call this a Banana Republic, but due to what is affectionately called “the system,” the womb producers do not have to worry about the direction of this economy. The taxpayers in this Banana Republic, USA, pay them to have sex and reproduce through monthly welfare that covers their rent and groceries and the recently doubled, refundable child-tax-credit welfare that now equals half of the yearly pay of many for full-time work, whereas it used to max out at 1/3rd of yearly pay at $6,444. Our country now has 5% of the world’s population and 25% of its prisoners. What is Banana Republic-like about that? Government pays the gentle, responsible “working families” for working part time to stay below the earned-income limits for the womb-productivity-handout programs and the cut off for the tax welfare. That takes care of morality and a sound economy at the same time, because as we all know, population growth via sex and reproduction is the central (and only) aspect of economic growth. It does not matter that we already have a heaving, ample, youthful generation of citizens — larger than the Baby Boom that sired them — and an unending flood of young, baby-making immigrants, but yet, other than the top 20% of dual-high-earner parents in their dream homes and on their 14th excused babyvacation to Europe for the year, the rest of the population is going from a middle-class lifestyle to blighted neighborhoods and a miserable quality of life. Subsidized buns in the oven at the bottom are the solution to keeping the Banana Republic at bay, as long as their moms work temporary and part-time jobs and are “career” women. The other half of the economic plan to avoid a Banana Republic, conveniently, involves concentrating the few good salaried jobs in fewer households via assortative mating at the top and keeping almost all of the fruits of business production at the top, too. It will expand the economy, like it did in the days of aristocratic power marriages and womb-productive, cake-fed serfs at the bottom. What is Banana Republic-like about aristocrats, entrenched civil servants and church royalty, throwing cake crusts (LOTS of them in the USA) to reward the serfs for sex and reproduction? The aristocrats of Old Europe saved the womb-productive adults and the babies through this cake throwing, writing religious treatises about it to congratulate themselves for piety, rather than going on CNN to virtue signal with a publicity benefit. 

This is progress. 

In reply to by TheWholeYearInn

Last of the Mi… Tue, 02/06/2018 - 08:22 Permalink

Net Net? More supply side pushes markets lower. You have to be kidding me. It's not a fucking thing to do with QE that has decimated, Main Street, Wages, and dry fucked every consumer anywhere with stealth inflation. (new car prices anyone..  anyone. . Bueller?) and the result is "supply side pushing markets lower". What a fucking joke.

HillaryOdor Tue, 02/06/2018 - 08:23 Permalink

The long VIX ETFs are still good, right?

I guess I missed the boat on that one. I wanted to buy TVIX yesterday morning but chickened out after it was already up 8%. I thought stocks would come back up some before the big crash.

Hillarys Server Tue, 02/06/2018 - 08:31 Permalink

I own some humble silver scraps but don't own stocks so for years I've been hoping equities would crash to the lowest level of Dante's hell to prove my strategy correct.

But I learned last week that a close family member owns a lot of equities.

So now even the joy of watching people lose money and jump out of windows has been mercilessly taken from me.

Life is so unfair.

Hillarys Server firststef Tue, 02/06/2018 - 08:56 Permalink

Haha, thanks. I was just going to delete it and write "duplicate" or something and saw your comment.

Yes, after stopping work for now at 61 I've watched doom porn on YouTube every day for the past three years while holding tightly onto my roll of silver dimes and scap metal and saying "Die market die. Die a painful death you equity fcckers."

And waking up the next day and repeating the process year after year. And everyone is making money but me including my retard relatives who tell me "Trump peed on a bed. He peed on it. Putin's got him."

Now I try to mainly just read ZH for news and on YouTube instead of news I watch documentaries on WW1, WW2, the fall of Rome, Greek philosophers, AI, American history and summaries of each of the Great Books which I had never read. Now I'm gaining something every day.

I realized I had watched three hours of Infowars and so on every day for two or three years and it's been great fun but it hasn't accumulated to anything spiritually for my life or prepared me to feel good when I lie on the hospital bed with tubes in me and prepare to meet my master.

In reply to by firststef

nuerocaster Hillarys Server Tue, 02/06/2018 - 09:13 Permalink

Because of course you can't book profits along the way.

In junkie nation it's all addictive behavior all the time.

It's their cell phone blankie, social media imaginary friends, children's games on tv, porn, psychotropics,etc, etc.

Because they're afraid of just about everything. Not that they don't have a high opinion of themselves.

So the desperate search goes on to suppress, to assuage, fear. To prop up egos.

In reply to by Hillarys Server

JailBanksters Tue, 02/06/2018 - 08:35 Permalink

It's like Physics, for every action there's an equal and opposite reaction.

In the stock market it equal to, for every pump, there's an equal and opposite dump.


gmak Tue, 02/06/2018 - 08:53 Permalink

The VIX didn't go bananas. It just responded to being held down and compressed for so long. The amount of money through margin / borrowing needed to maintain the compression got bigger and bigger. At some point, it was not longer enough.

adr Tue, 02/06/2018 - 09:19 Permalink

Did they really buy futures up 1400 points last night?

Fuck, just like the election. "Someone" stepped in and bought up funds hand over fist to prevent market crash. 

Same thing last night.

Avichi Tue, 02/06/2018 - 09:23 Permalink


bigloser Tue, 02/06/2018 - 09:25 Permalink

When all of this shakes out, I'm going to open a restaurant with my gains from silver hoarding.

It's been an idea percolating around in my head for some time, and I've finally found the pigeon (bought the place I was looking at two years ago, rehabbed it and is now losing his ass) to put me into bizniz.

Gonna be a fun ride down the next six to 18 months. 2008 will look like a walk in the park.

Gimme some, finally...

Ink Pusher Tue, 02/06/2018 - 09:32 Permalink


The patient is still alive but will be on life support throughout the next week as the real collateral damage is assessed and realized. The willingness of Morgan Stanley to pull the plug on the next day only indicates their expressed will to mitigate any further negative press which should drive everything even lower over the next 10-14 days while reality sets in and we see who the biggest losers really are. Halting the VIX won't change facts or sentiments.

walküre Tue, 02/06/2018 - 09:50 Permalink

Canada's WEED stock is rallying and the VIX is dead

Makes sense.. there's a whole lot of new usage coming online for pot when the market goes to rot