I Remember The Epic VIX Short Squeeze

Remember remember the 5^th of Febvember. 
Options and futures and plot
I see no reason why any short gamma squeeze season
Should Ever be forgot.
People seem to have short memories in the world of finance. 

Retail investors have found a new trick, where they can act in unison and put the pain to the market where it has a weak spot. The dual squeezes in GameSpot GME, first short interest, then gamma squeeze has allowed for parabolic gains in the name which is leaving the professionals scratching their heads. 

It truly is a short squeeze of epic proportions. But this isn't the first time this has happened. I remember when this same thing happened in the VIX.

Feb 5, 2018 is a date I will never forget. It was a Monday. The Eagles had just beaten the Patriots 41-33 in the Super Bowl, and the market was coming off its worst week in two years with the Dow down 4.1% and the S&P down 3.9%. There had also been a fantastic jobs report the previous Friday and rates were making a move, causing global equities to slide.

So how would all this create a short squeeze? Well, the setup was there was a record short interest in VIX futures heading into February. Inverse VIX ETPs and levered VIX ETPs had grown and grown as the easy money seemingly was betting on contango to continue to drive the VIX trade lower. The levered long trade was so heavily shorted it created a squeeze.

So what happened on that day that is so memorable? For most of the day, the market was in chaos, with huge losses across the board. However, at 3:30 ET, the VIX shot up 66%. Strangely, the VIX ETPs only shot up 20%. The fact that these products lagged the VIX is not unusual, but a lagging of this magnitude was highly unusual.

As the market went into the close, many funds began panic buying to cover shorts as volatility went higher. Further buying pressure was triggered by the inverse funds themselves, which, as per their prospectuses, had to close their positions if the VIX ever shot up 80%. Naturally, the market went there, which triggered a new wave of short covering. At 4:15, VIX futures closed up a staggering 116%.

Needless to say, many changes have taken place since then. People don't short VIX futures with reckless abandon anymore. Also, the levered longs and inverse funds have taken measures to reduce their own risks (Credit Suisse also shut down its inverse VIX ETN afterward).

I've been thinking a lot about this "Volapocalypse" these past few days. It's reminded me to always control my risk. I hope these GameStop traders do the same.