Guest post by Vix and more.
It was only a week ago that I discussed the performance of 31 VIX and volatility-based exchange-traded products in VIX ETP Returns for Q1 2012and barely a month ago that I examined in some detail the workings of two VIX ETPs, VQT and XVZ, in Dynamic VIX ETPs as Long-Term Hedges. When stocks fall and volatility rises, however, which VIX ETP hedges work the best?
The answer is not so simple, unless you know when volatility will begin to spike, how far it will go and how long it will take to get there. Even then, it would still be helpful to know what happens to the VIX futures term structure along the way. Also, there are liquidity constraints that will probably limit the choices for most investors to a half dozen or fewer alternatives.
That being said, the current selloff can be used to highlight some important heuristics and alternative approaches. The first graphic below, for instance, illustrates the performance since the April 2 close of five representative and relatively liquid VIX ETPs (TVIZ was excluded on the grounds of liquidity; its performance during the period was similar to that of VXX) that can be used as hedges. For the most part, the performance trend is the opposite of what was observed during the first quarter.
Guest post by Vix and more.
If you thought the TVIX (VelocityShares Daily 2x VIX Short-Term ETN) story was behind us, you might want to think again.
No, I am not talking about the recent news that FINRA is “looking at the events and trading” associated with TVIX and more generally that the regulator has “a review under way looking at a host of issues relating to ETNs and other complex products.”
Instead, my interest is in the return of some meaningful premium in TVIX relative to its Intraday Indicative Value (a real-time estimate of an ETP’s fair value, based on the most recent prices of its underlying securities) during the last three days.
For some historical perspective, consider that in the months prior to Credit Suisse (CS) suspending creation units on February 21, TVIX typically traded at a premium of about 0.5% above its indicative value. After the creation units were suspended, the premium vacillated wildly (as seen in the graphic below), though for several weeks the premium was locked in a relatively narrow range of 10-20%. That premium over indicative value spiked to 89% on the day before the announcement that Credit Suisse was resuming creation units. Once that resumption of creation units was announced, the premium in TVIX fell all the way back to 2% in just three days, no doubt signaling to many that it would soon be business as usual in TVIX trading.
During the last three days, however, the TVIX premium is has remained largely in the 10-15% range, ending today at 11.4%.
Another great weekend reading by Grant Wiliams.
ETFs definitely provide
easy diversification, tax efficiency and low ex- penses to investors while offering the benefits of ordinary shares such as limit orders, short- selling and options markets BUT, the desire to entice investors into the market by making a cornucopia of investment opportunities to them through simple vehicles has led to a ‘dumbing- down’ of the investment process in a never- ending quest for the simplest possible route into an idea when the plain truth is, there ArE no substitutes for doing the necessary research required when thinking about investing money into something. The unevenness of the regula- tory regime surrounding these instruments has not exactly helped matters in that it has made investors believe that if they are allowed to do something, it must be safe.
The pejorative term ‘Videogame Generation’ is frequently aimed at the youth of the 90s and 00s who, it is alleged, sit in front of their TV screens mindlessly pushing buttons and pay-
ing no attention to the world around them. It is synonymous with a group of people who, it is felt, look for simplicity and convenience and cannot be bothered to engage with the world. It implies a certain amount of intellectual deser- tion on their part which, when one looks at the complexity of the games they are playing, is perhaps not justified.
If you have ever watched a rapt teen playing Guitar Hero or trying to infiltrate an enemy lair in Call of Duty, you will know, as i do, that these are extremely complex, hard to master and pro- vide enormous gratification to those successful in winning.
It used to be the same with investing, but now that too has been dumbed-down – a dangerous direction in which to go.
Full must read Hmmm Apr 01 2012
The TVIX collapsed under heavy trading yesterday. After the close CSFB said it will create new shares, and the TVIX fell even further in after hours trading. From Vix and More.
One month and one day after Credit Suisse (CS) announced the suspension of new creation units in the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), the issuer announced today that it plans to reopen issuance of TVIX “on a limited basis” effective tomorrow.
In a twist, the press release also noted:
“Beginning March 23, 2012, Credit Suisse may from time to time issue the ETNs into inventory of its affiliates to make the ETNs available for lending at or about rates that prevailed prior to the temporary suspension of issuances of the ETNs. Also, beginning as soon as March 28, 2012, Credit Suisse may issue additional ETNs from time to time to be sold solely to authorized market makers. Credit Suisse may condition its acceptance of a market maker’s offer to purchase the ETNs on its agreeing to sell to Credit Suisse specified hedging instruments consistent with Credit Suisse’s hedging strategy, including but not limited to swaps. Any such hedging instruments will be executed on the basis of the indicative value of the ETNs at that time, will not reflect any premium or discount in the trading price of the ETNs over their indicative value and will be on terms acceptable to Credit Suisse, including the counterparty meeting Credit Suisse’s creditworthiness requirements, margin requirements, minimum size and duration requirements and such other terms as Credit Suisse deems appropriate in its sole discretion.” [emphasis added]
Remember that Lehman week? What happened to volatility and the market? Similarities to 2008 and Lehman Brothers? Yes.
The equity market has been trading in a rather peculiar mood, still dominated by news primarily out of Greece. Other risk measures on the other hand have shown escalating concerns of risk. Credit and volatiliy are currently implying something different to the equities market. Let’s see who will get the upper hand. Meanwhile some observations from last Friday’s action.
On Friday the SPX was unchanged at the lows over the course of five hours, yet TVIX spiked 15.5% in that period, a huge intraday deviation from the
normal negative correlation. Last week we saw app 22% jump in the VIX, while the SPX remained flat. The week of September 15, 2008, when Lehman
filed for bankruptcy the Vix gained app 22% in a week (close to close, although it traded much higher intra week)) and the S&P was practically flat. Is something about to happen? Observations with charts below;
The Market is continuing the dull no volume action. We are getting an increasing feeling of people almost abandoning having any opinion of where the market is heading. Low volumes, low volatility, and few see any risks. Biggest fear among investors at present, is not being long Apple. We should have gotten a break up with volume by now. With investors reaching apathy it is time to start buying some of those ultrashorts.