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.