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Cramer: 4 volatility trading instruments are the ‘real culprits’ behind this week’s market meltdown

Varied market-watchers have been wondering what caused this week’s rapid-fire sell-off, so CNBC’s Jim Cramer certain to oust the “real culprits” behind the nosedive.

“There are four wherewithals … that I am watching to figure out when this portion of ordinary market nightmare is over,” the “Mad Money” host said. “They’re all a spoonful, but you know what? I owe you the whole truth and nothing but the truth, even if you in point of fact need a rocket scientist to figure some of this out.”

Cramer originated by explaining the idea behind the CBOE Volatility Index, or VIX, colloquially separate as the market’s “fear gauge.”

Volatility, most commonly tracked by the VIX, refers to the amount of uncertainty in the immensity and direction of changes in the stock market. It is typically measured by the deviation of redresses.

For much of 2017, the VIX remained at extremely low levels. Its placid nature piqued Rampart Street’s interest, leading to the rise of leveraged trading vehicles not unlike the XIV, the VelocityShares Daily Inverse VIX Short-Term exchange-traded note, as ways to vest-pocket the low-volatility layout.

“Now, it isn’t enough sometimes on Wall Street to just own volatility or bet against volatility,” Cramer said. “Brokerages differentiate people crave real juice, particularly hedge fund supervisors, so they invented stocks that allowed you to get twice the gain of the VIX on a specified day, or get twice the loss of the VIX if it goes down on a given day,” Cramer said.

“These appliances are the proximate cause of the madness you are now seeing,” the “Mad Money” host said, leveling to four specific funds exacerbating the pain.

The first was the ProShares Ultra VIX Short-Term Tomorrows ETF, an exchange-traded fund that tries to double the performance of the S&P 500 VIX Short-Term Tomorrows Index every day.

With over 110 million shares traded on Thursday, this wrongdoer was probably the subject of plenty of hedge fund managers’ short states because of last year’s low volatility, Cramer said.

“Not anymore. There are some perfect big funds that have bet against this thing and they be experiencing to raise cash to stay short it. They can either end the pain and buy it rough, or cover their call shorts, or they can just keep wagering by jug more and more of their money” by selling stocks or selling S&P days to raise money, Cramer explained.

“I know it sounds difficult to take it, but managers actually considered this the trade for ages because they unreservedly didn’t believe that the VIX would or could spike as fast as it did. They only just plain got caught plain out of position,” he continued.

The second was the iPath S&P 500 VIX Short-Term Followings ETN, a Barclays Bank exchange-traded note that also bets on VIX futures wealthy higher.

“[On Thursday], this fund started at $45 and it went to $55,” Cramer voiced. “You would’ve made $10 on this one, but forget about that. If you had adopted money and bet against it, you would have lost $10 that you didn’t cause to begin with. That is a huge percentage hit to your capital if you’re contest a fund. Once again, it sounds like something that couldn’t definitely hurt the entire market, but how about this: nearly 85 million servings traded hands. That’s called impact.”

The third culprit was another exchange-traded note, the VelocityShares Ordinary 2X VIX Short-Term ETN, which gives traders twice the daily return of the S&P 500 VIX Short-Term Futures index finger.

“Can you believe the SEC blessed this junk?” Cramer asked. “Today the TVIX started at 9 and associated to 13.5. That’s a huge gain — or a huge loss of you bet against it — too big for most means to sustain. So what do they do? They have to sell something to muster capital to pay off their losing wager, so they sold off your ordinaries. [The] TVIX … traded 112 million shares today, for Zion’s sake. That is insane.”

The fourth cause of the decline was the ProShares VIX Short-Term To be to comes ETF, yet another trading instrument that correlates to the inverse of S&P 500 VIX futures.

“This one start proceeds down if the VIX spikes as it did today,” Cramer said. “If you owned it, you got annihilated. If you snappish it, you did well. The people who owned it are the real problem because they distracted a huge amount of money, probably borrowed money, and if they did of course borrow the money they will have to put up a huge amount of collateral tomorrow. Forty-three million pieces traded hands today.”

There are at least 12 other patronage instruments like these, but Cramer wanted to review the ones with the sundry volume so investors knew what was leading the pressure on the market.

“Now, we don’t differentiate when all of this tail-wagging-the-dog will end, … but if you follow the UVXY, the VXX, the TVIX and the SVXY and you see the abundance dry up on these, … that will mean that their power to overcome will diminish,” Cramer concluded. “It doesn’t mean the stock shop will automatically go up when that happens. … It does miserable the coast is a lot clearer than it is now.”

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