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Leveraged Volatility Trading Vehicle Fading Away
- By Brendan Conway
Vance Harwood over at the blog Six Figure Investing notices a small but interesting landmark on a subject we’ve
been following — Credit Suisse’s (CS) leveraged volatility-trading note has fallen below a buck. If it hangs out below this
price long enough, the exchange may delist it.You may remember the VelocityShares Daily 2x VIX Short Term ETN
(TVIX) as the site of some unusual happenings in exchange-traded products earlier this year. Back in February, this
complex basket of volatility futures looked like it was headed for $1 billion in assets under management, as investors
piled into bets on higher market volatility.But Credit Suisse cut off new share creations, citing internal limits, which
suggested the thing got bigger than the firm was prepared to handle. In ETFs and ETNs, this is bad news. Without the ability to create new shares, the product starts to trade like a closed-end fund, in this case a leveraged one. TVIX’s price
swung far higher than the index for weeks, and then plunged just before the firm announced a share-creation reopening. Credit Suisse included new language about how other parties involved in the product hedge themselves, pointing to the reasons the shutoff happened in the first place. The price ended up with a two-day plunge of 50%, and looked bad enough to attract regulators’ attention.Most volatility ETNs are more or less designed to fall indefinitely, all the way down to zero if they weren’t subject to periodic reverse splits. This is why they tend to have reverse splits regularly. TVIX was the only well-known product not to have a reverse split this fall.Accordingly, TVIX has broken the stock market’s Mendoza line. As of this morning, it traded as low as 99 cents. It’s down 3.7% to $1.01 at the moment.Harwood
speculates that letting the thing die a quiet death is the path of choice:
been following — Credit Suisse’s (CS) leveraged volatility-trading note has fallen below a buck. If it hangs out below this
price long enough, the exchange may delist it.You may remember the VelocityShares Daily 2x VIX Short Term ETN
(TVIX) as the site of some unusual happenings in exchange-traded products earlier this year. Back in February, this
complex basket of volatility futures looked like it was headed for $1 billion in assets under management, as investors
piled into bets on higher market volatility.But Credit Suisse cut off new share creations, citing internal limits, which
suggested the thing got bigger than the firm was prepared to handle. In ETFs and ETNs, this is bad news. Without the ability to create new shares, the product starts to trade like a closed-end fund, in this case a leveraged one. TVIX’s price
swung far higher than the index for weeks, and then plunged just before the firm announced a share-creation reopening. Credit Suisse included new language about how other parties involved in the product hedge themselves, pointing to the reasons the shutoff happened in the first place. The price ended up with a two-day plunge of 50%, and looked bad enough to attract regulators’ attention.Most volatility ETNs are more or less designed to fall indefinitely, all the way down to zero if they weren’t subject to periodic reverse splits. This is why they tend to have reverse splits regularly. TVIX was the only well-known product not to have a reverse split this fall.Accordingly, TVIX has broken the stock market’s Mendoza line. As of this morning, it traded as low as 99 cents. It’s down 3.7% to $1.01 at the moment.Harwood
speculates that letting the thing die a quiet death is the path of choice:
If Credit Suisse has not figured out how to fix TVIX so that it tracks its index acceptably, they might want it to go away. They can do this by doing nothing.Without a reverse stock split TVIX will be eroded down towards zero by contango. If there aren’t any significant volatility spikes TVIX tends to decay around 90% per year, so it will probably take until December before it drops below $1. Once its average price over a 30 day period has dropped below $1 it can be delisted by the NYSE.Fade to black.
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