Can UVXY/TVIX "malfunction" like XIV and SVXY?

[Saltynuts]

I realize that being long UVXY/TVIX is bad in the long term, given that they will always fall given enough time, and that shorting them is extremely risky given that they can skyrocket at any time.

But I'm curious - can they essentially "malfunction" like XIV and SVXY did? Like can they go to a trillion or negative trillion?

Thanks.

 

[Maverick74]

I realize that being long UVXY/TVIX is bad in the long term, given that they will always fall given enough time, and that shorting them is extremely risky given that they can skyrocket at any time.

But I'm curious - can they essentially "malfunction" like XIV and SVXY did? Like can they go to a trillion or negative trillion?

Thanks.

There was no malfunction. XIV did EXACTLY what it was suppose to do. TVIX and UVXY also do EXACTLY what they are suppose to do. There are no free lunches out there. Maybe an old rotten banana laying around every now and then. But that's about it.

 

[Saltynuts]

Thanks Maverick74. Then why are they shutting down XIV? And I read last night that holders of both XIV and SVXY might get nothing as they were going to liquidate. There certainly seems to be some malfunction. VIX today was down 92%. UVXY was down 33%. TVIX 40%. In that environment you would think that XIV and SVXY would be up BIG today. But what did they do? Down 80% to 90%.

Something "broke" with them it certainly looks like. "Broke" might be semantic, but the point above is what I'm getting at. UVXY and TVIX did not appear to "break", but XIV and SVXY did.

Thanks!

 

[stevenpaul]

There was no malfunction. XIV did EXACTLY what it was suppose to do. TVIX and UVXY also do EXACTLY what they are suppose to do.

I see that VXX was actually up today, while the VIX futures were down. Plus, UVXY and TVIX were down. I see why those last two were down on the day, but why would VXX be up?

 

[Saltynuts]

Saw that as well stevenpaul. VXX up when it should be down, XIV and SVXY waaaaay down when they should be waaaaay up. Compare VXX with VIIX, which was actually down a bit. Freaking weird.

 

[Maverick74]

Thanks Maverick74. Then why are they shutting down XIV? And I read last night that holders of both XIV and SVXY might get nothing as they were going to liquidate. There certainly seems to be some malfunction. VIX today was down 92%. UVXY was down 33%. TVIX 40%. In that environment you would think that XIV and SVXY would be up BIG today. But what did they do? Down 80% to 90%.

Something "broke" with them it certainly looks like. "Broke" might be semantic, but the point above is what I'm getting at. UVXY and TVIX did not appear to "break", but XIV and SVXY did.

Thanks!

They are shutting it down because in their prospectus it states there is a termination clause should there be a tail event which they described as an 80% increase in volatility. The VIX went up 100%. XIV was designed to give you the exact inverse of that, which in this case would be down 100%. It worked. Being long XIV meant you were making an implicit bet that vol would not go up 80% in one day. Well, it did just that.

The reason it went down today after the market rally was because they announced it would be liquidated at it's NAV value in 2 weeks which currently is around $4. Everything worked like it was suppose to.

Pretend you buy an ETF on short term rates. And in that ETF there is a clause that says if short term rates go negative then the ETF will liquidate. This would be a very rare event but it can and does happen. So if rates go negative then that ETF would close. Investing in that ETF carries that risk and you are OK with that if you buy it.

 

[Maverick74]

I see that VXX was actually up today, while the VIX futures were down. Plus, UVXY and TVIX were down. I see why those last two were down on the day, but why would VXX be up?

VXX roles daily. The market is in steep backwardation. This is very rare but when it happens you actually earn a roll yield on VXX. That will cause VXX to benefit on the forward roll which they do daily. That means they are selling the "high priced" front month future and buying the "low priced" future in the next month. Normally the VIX is in deep contango where the opposite happens and is responsible for the ugly negative roll yield that long vol holders experience where they sell the cheap decaying front month future and buy the expensive 2nd month contract.

 

[beerntrading]

There was no malfunction. XIV did EXACTLY what it was suppose to do. TVIX and UVXY also do EXACTLY what they are suppose to do. There are no free lunches out there. Maybe an old rotten banana laying around every now and then. But that's about it.

This is a pretty good point that illustrates the disconnect between perceived risk and actual risk...and the hard-wired human tendency to overestimate reward and underestimate risk. Lots of lessons to be learned in yesterday's VIX fun.

 

[Saltynuts]

Maverick74 (and beerntrading), thanks a TON. I understand what you are saying. So let me ask you this. For UVXY and TVXS, is there any "implicit bet" that would drive the price of those either to actually zero, or potentially to infinity? Thanks!

By the way, any volatility related ETFs you particularly like or dislike? For example, VXX "rolling daily". Sounds like generally this is a good thing, but in rare cases can be bad. Don't know of the others do that.

Thanks!

 

[Maverick74]

Maverick74 (and beerntrading), thanks a TON. I understand what you are saying. So let me ask you this. For UVXY and TVXS, is there any "implicit bet" that would drive the price of those either to actually zero, or potentially to infinity? Thanks!

By the way, any volatility related ETFs you particularly like or dislike? For example, VXX "rolling daily". Sounds like generally this is a good thing, but in rare cases can be bad. Don't know of the others do that.

Thanks!

If you have EXCEL you can play around with shock events and see how they affect these ETF's. Almost all the firms who create these ETFs explain they are meant to be very short term vehicles as their stated goal is to match daily returns, not long term returns.

The VXX roll is NOT a good thing. Only when the VIX is in backwardation do you get paid to hold it. In a normal market you have about a 7% negative roll yield which if it's a 2x ETF, you lose 15% a month on the roll holding it. That is what is suppose to happen otherwise buying the VIX would be a risk free trade. Think of the negative roll yield as the premium you have to pay to buy and hold a mean reverting product. BTW, this roll yield is just as applicable to commodity ETFs like oil which can have very steep backwardation or contango.