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The backstory as I see it is.....
There are two things:
1) Being â€ślongâ€ť volatility.
2) Being â€śshortâ€ť volatility.
Being â€ślongâ€ť volatility might be beneficial in that volatility often goes up when the market goes down. Being â€ślongâ€ť volatility MIGHT thus sometimes be a decent hedge against declining stocks.
The stock market was/is high (in many ways).
And volatility was at an all time low (several weeks ago).
The problem with being â€ślongâ€ť volatility is with the complexity of the instruments (depreciating derivatives) and leverage.
Being â€ślong volatilityâ€ť MIGHT sometimes makes sense.
But it is highly complex and highly problematic.
I believe that this is what 50 cents (or his investment team) is supposed to have done (successfully).
2) The implosion that the article discusses is associated with being â€śshortâ€ť volatility.
This has the same problem as being â€ślongâ€ť volatility- in that you are investing in depreciating derivatives that use leverage.
But being â€śshortâ€ť does NOT have hedge justification that being â€ślongâ€ť might have.
In effect you are betting that volatility (already at record lows) is going to get lower quickly.
Being â€śshortâ€ť volatility in late January would argue that- 1) Markets would be even less volatile (markets were at a record low volatility), or 2) Markets are likely to go up more than expected.
Basically being â€śshortâ€ť volatility is a ridiculously complex investment that. The strategy probably only make sense to a few very specific types of institutional traders.
And would almost never make sense for a retail investor.
But it was supposedly retail investors that were invested in this inverse volatility thing XIV (backwards of VIX- the volatility index).
Which begs the questions...
Who- Kramer (and others) says it was arrogant yahoos
Why - these yahoos believed themselves to be geniusâ€™ but ironically didnâ€™t understand what they were doing .
The Kramer explanation seems likely to me.
But I didnâ€™t investigate the Kramer thesis.
People are making money through this, but that doesn't mean they are playing fair. The article about the manipulation of options in the 30 day range... let's just say it doesn't surprise me. Someone like 50 cent may have been well aware of the manipulation and intentionally played into a correction. I realize that's just speculation, but for the guys that eat and breathe and sleep this stuff, I don't think it's mere luck.