Wall Street is piling back into the trade that blew up earlier this week

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Thomson Reuters

  • Traders are piling back into the short-volatility trade that imploded earlier this week.
  • Assets under management by the ProShares Short VIX Short-Term Futures ETF have more than doubled since Tuesday.

Wall Street is unpredictable by nature, but this is one for the books.

Traders are pouring back into the trade that imploded earlier this week: Short volatility.

The ProShares Short VIX Short-Term Futures ETF (SVXY) and VelocityShares Daily Inverse VIX Short-Term ETN (XIV) blew up in after-market trading Monday, falling from a combined $3 billion to $150 million – nearly 95% of their value in mere minutes. Credit Suisse said it would pull the plug on the VelocityShares fund later this month.

But now traders are hoping back on the short VIX bandwagon. Assets in the ProShares fund have risen sharply from $300 million on Tuesday to $640 million Friday morning, according to Bloomberg data.

The implosion of the two funds – which are designed to return the inverse of the Cboe Volatility Index – followed more than a year of stellar returns fueled by a market stuck in the doldrums.

This week marked a sharp departure from that environment. Not only did the stock market enter an official correction, but the VIX has stayed above 30 points.

Ed Tilly, the head of Cboe Global Markets, the exchange behind the VIX, said much of the hype around the implosion of the two funds was overblown.

“The US options and the US futures markets performed exactly as designed not only Monday but yesterday,” Tilly said. “The media doesn’t print the story that we worked exceptionally well.”

“The short VIX strategy isn’t going away,” he added.

That hasn’t mollified investors’ concerns about Cboe. The company has been under pressure this week because of its reliance on VIX-linked revenues. Its stock has dipped by more than 22% since the beginning of the week.

“While we appreciate management proactively addressing investor concerns and providing some data points, we believe there was not enough detail for investors to regain full comfort in the stock,” UBS analyst Alex Kramm said in a note to clients Wednesday after the exchange held an impromptu conference call. “As such, we believe CBOE could be a show-me story for now, with investors closely watching volume and open interest trends to see if market dynamics may significantly change.”