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  • (dramatic music)

  • - [Liz] Over the past few months,

  • volatility has ruled the markets.

  • Here's the S&P 500 on Thursday, June 11

  • when the index fell 6% in a single day of trading.

  • It was a rough day.

  • But not for everyone.

  • This chart from the same day shows the price

  • of UVXY, a fund that's tied to market volatility.

  • You can see, as the S&P tumbled, UVXY gained.

  • This fund in a type of volatility trade,

  • which is a kind of bet

  • that has lately attracted more investors and critics.

  • Analysts say volatility trading doesn't only benefit

  • from market turbulence,

  • it can actually make the swings bigger,

  • which could make markers riskier for everyone.

  • We'll explain.

  • To understand volatility trading,

  • a good place to start is the CBOE Volatility Index

  • or the VIX.

  • The VIX is known as Wall Street's fear gauge

  • and it basically measures market volatility

  • and it's based on options prices tied to the S&P 500.

  • - [Liz] The VIX tracks the price

  • of calls and puts, which are contracts

  • that allow investors to bet on whether stocks

  • will rise or fall.

  • When a lot of investors are expecting big swings,

  • that demand can drive up the price

  • of calls and puts.

  • For example, on March 16, the VIX rose by 43%,

  • a huge jump that led the index to a record close.

  • - So on March 16th, the market crashed.

  • Stocks had one of the worst days in history.

  • Investors were reaching for options contracts

  • throughout the day, driving up the prices

  • of those options contracts

  • because they expected more volatility in the future,

  • and that drove the VIX up.

  • - [Liz] Now, on that day,

  • traders were not only betting which way stocks would go,

  • they were also betting on which way the VIX would go.

  • That's a type of volatility trade

  • but there are others too.

  • In fact, there's a whole ecosystem of trading products

  • that allow investors to bet on how rough

  • or calm the markets will be.

  • Experts say these bets

  • and the hedging traders do to cover them

  • could be affecting the market in really big ways.

  • - So volatility started out as a metric

  • to measure the market

  • but now we're seeing thee products

  • that trade volatility and the whole host of derivatives

  • to trade volatility getting so big

  • that some analysts say

  • that they can actually influence the market

  • and drive more volatility.

  • - [Liz] This current stretch of market swings comes

  • after a decade of increased interest

  • in this type of trading.

  • Here's a look at assets in hedge-funds

  • that trade market turbulence

  • and here are assets under management

  • for exchange-traded products tied to the VIX,

  • like the UVXY.

  • You can see, the volatility business took off

  • after the financial crisis

  • and grew from there

  • as bankers devised new and risky ways to trade it.

  • Both charts mark 2020 as a record high.

  • - It's been a crazy few months

  • for the stock market

  • and we've seen some of the biggest swings

  • we've ever seen in history

  • and what that's done is actually that's drawn more interest

  • to these types of trades, the volatility trades.

  • That means people are putting more money

  • in these exchange-traded products

  • that bet on volatility.

  • - [Liz] For some investors and hedge-fund managers,

  • the strategy has paid off.

  • - One investor I spoke to,

  • his strategy's up more than 200% through May

  • while the S&P 500 has fallen over that timeframe.

  • - [Liz] Remember UVXY?

  • Here it is for the full year

  • and this is the spoke we showed earlier.

  • UVXY has had some big gains

  • but not everyone has won.

  • There have also been big downward moves,

  • leaving some investors with huge losses.

  • - We saw just this year professional investors

  • and professional hedge-funds that trade volatility,

  • some of them took some really big loses

  • or shut down entirely.

  • Look, these are really risky strategies

  • and it's important for investors

  • to proceed with a ton of caution

  • because it's definitely not a guaranteed win

  • for you to bet on market volatility

  • and even some of the most successful

  • and sophisticated investors

  • can have trouble with these trades

  • because they can be really difficult

  • to manage the risk associated with derivatives trading.

  • - [Liz] It's unclear how long this current bout

  • of market turbulence will last

  • but experts agree on something.

  • A more volatile market is also a riskier one.

  • (dramatic music)

(dramatic music)

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    洪子雯 posted on 2020/06/26
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