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

[beerntrading]

Secondly, whatever it did today, it would seem that either UVXY and TVIX on the one hand, or SVXY and XIV on the other hand, were far, far off the mark, given that they both went down by huge amounts. How is this so if they are supposed to be opposite the very same index? "

These are heavily influenced by supply and demand in a way equity derivatives are not. With equities, if the option (or future) were to be bid up past parity with the stock itself, this would present an arbitration opportunity which would quickly be taken up by someone who then takes up the other side on the derivative and the underlying for a guaranteed winning position (and thus bringing market forces into balance on the derivative). With something like the VIX, there is no underlying security to trade, so the markets can get quite far flung from the "intrinsic" value of the index. Add into that the VIX futures and options are based on expected value on expiration (not current spot value) and these are pretty far removed from the lock-step intrinsic / extrinsic valuation you see on equities. So I don't see anything particularly abnormal with these moving seemingly freely from their "underlying" and I'd expect today to show this particularly strongly.

So yes, they should move predictably with the underlying, but they don't since there's no underlying to trade the arbitrage opportunity.

 

[Saltynuts]

A short ETF or ETN is inherently leveraged. When the underlying rises, it must buy back some shorts to prevent the exposure from being more negative than -100%. I think XIV and SVXY were crushed because their own anticipated buying demand for VIX futures pushed the VIX futures to artificially high levels. TVIX is double long VIX futures, and if it got too big, on day where VIX futures were already down it could add to downward pressure on VIX futures on the close. VIX futures cannot go below zero, so there is a limit to the downward pressure. VXX is not leveraged, so I don't think it has the same risks as XIV, SVXY, or TVIX. Of course it has negative expectancy, but that is a different issue.

Thanks ajensen! I'm trying to think through your post.

"When the underlying rises, it must buy back some shorts to prevent the exposure from being more negative than -100%. I think XIV and SVXY were crushed because their own anticipated buying demand for VIX futures pushed the VIX futures to artificially high levels. "

That makes sense to me. Let's say, just to keep it simple, they have sold 100 VIX futures. As VIX futures rise, let's say to 150, not they have to buy back 50 to bring their VIX futures back down to 100 to have a 100% inverse daily relationship. That would tend to push the VIX futures up, causing the need to purchase more, problem compounds.

"TVIX is double long VIX futures, and if it got too big, on day where VIX futures were already down it could add to downward pressure on VIX futures on the close. "

Not following this really - where you say "it got too big", you mean the futures held by TVIX? How would it get too big on a day where the VIX futures were already down?

"VIX futures cannot go below zero, so there is a limit to the downward pressure. "

So, I understand how XIV and SVXY might differ from TVIX and UVXY in one sense. Let's say the short-term VIX index (again, not even sure what this is, just trying to keep it simple) is at 100. Let's say it jumps to 200. As Maverick explained that made sense, XIV and SVXY are supposed to replicate the inverse of this 100% drop, so they effectively drop to zero. TVIX and UVXY are supposed to do 200% of the opposite, so they jump to 300 (to be rebalanced). So XIV and SVXY are effectively wiped out, UVXY and TVIX can at least live to fight another day.

Just curious how they can both be down so much on the same day.

Thanks!

 

[Saltynuts]

These are heavily influenced by supply and demand in a way equity derivatives are not. With equities, if the option (or future) were to be bid up past parity with the stock itself, this would present an arbitration opportunity which would quickly be taken up by someone who then takes up the other side on the derivative and the underlying for a guaranteed winning position (and thus bringing market forces into balance on the derivative). With something like the VIX, there is no underlying security to trade, so the markets can get quite far flung from the "intrinsic" value of the index. Add into that the VIX futures and options are based on expected value on expiration (not current spot value) and these are pretty far removed from the lock-step intrinsic / extrinsic valuation you see on equities. So I don't see anything particularly abnormal with these moving seemingly freely from their "underlying" and I'd expect today to show this particularly strongly.

So yes, they should move predictably with the underlying, but they don't since there's no underlying to trade the arbitrage opportunity.

I think I follow you beerntrades, I understand how there is no "VIX" per se, only futures and options on it. So I follow you that they could move far from their underlying. Let me throw this out there. I've been watching XIV and SVXY on the one hand, and UVXY and TVIX on the other hand, for a long time and, until yesterday I believe, they really did move inverse to one another - on a daily basis XIV and SVXY would be up or down X%, and UVXY and TVIX would be down or up 2x%. This makes sense to me in that I believe they are supposed to hold the exact opposite futures balance - UVXY and SVXY just being holding twice as many long and XIV and SVXY holding half as many short. So the almost exactly opposite (factoring in the 2x/1x difference) seemed totally reasonable.

Then, today, they are both down huge. I'm still trying to come to grip as to how that could be.

Thanks!

 

[Saltynuts]

Ajensen, you also made this comment, which seems very interesting:

"VXX is not leveraged, so I don't think it has the same risks as XIV, SVXY, or TVIX."

In what sense is it not leveraged, and not subject to the same risks, as the other ones?

Thanks!

 

[ET180]

Not sure why people trade VXX instead of simply trading spreads directly on the VIX. Trading the VIX directly provides a lot more choice of expiration and strike vs. just blindly buying VXX. Whatever is saved in transaction cost is lost on time decay.

 

[ajensen]

"TVIX is double long VIX futures, and if it got too big, on day where VIX futures were already down it could add to downward pressure on VIX futures on the close. "

Not following this really - where you say "it got too big", you mean the futures held by TVIX? How would it get too big on a day where the VIX futures were already down?
Thanks!

I mean "too big" relative to the overall size of the VIX futures market. A small double long ETF that needs to buy 1,000 shares at the close when the usual closing volume is 100,000 shares is not a problem. But if it needs to trade more shares than are usually transacted at the close, it will move the price adversely.

 

[Saltynuts]

Not sure why people trade VXX instead of simply trading spreads directly on the VIX. Trading the VIX directly provides a lot more choice of expiration and strike vs. just blindly buying VXX. Whatever is saved in transaction cost is lost on time decay.

ET180, what is the time decay present in VXX that is not present in trading spreads on the VIX? My understanding (consistent with Maverick's explanation) is that whenever there is "contango", both the VIX long ETFs and a long spread in the underlying VIX options would both suffer drag over time. Is there something else present in the VXX that makes it decay even more over time?

Thanks!

 

[Saltynuts]

I mean "too big" relative to the overall size of the VIX futures market. A small double long ETF that needs to buy 1,000 shares at the close when the usual closing volume is 100,000 shares is not a problem. But if it needs to trade more shares than are usually transacted at the close, it will move the price adversely.

I follow you in part ajensen - if TVIX got too big versus the total futures market its buying/selling behavior could influence said market, compounding problems potentially. In your example where VIX futures are already down, however, shouldn't XIV/SVXY have started up, with TVIX buying potentially dragging them down a bit? But XIV and SVXY were 80%/90% down from the start. I don't think this can fully explain the discrepancy.

Thanks!

 

[Saltynuts]

ajensen, I saw in another thread you posted this:

"Regular trading in VIX futures ends at 4:15pm EST, 15 minutes later than for ETFs, so if futures prices move in that time, the returns measured from yesterday's close will differ for futures and ETFs."

Could this explain the issue? VIX futures skyrocketed after-hours, and rebalancing for the next morning essentially caused a wipe-out of XIV and SVXY, but not TVIX and UVXY for some reason? Thanks!

 

[stepandfetchit]

It seems that SVXY will remain a viable product going forward (for the time being).
The following from the prospectus, should instill confidence (not so much!):
"
Termination Events


The Trust, or, as the case may be, a Fund, may be dissolved at any time and for any reason by the Sponsor with written notice to

the shareholders.

-
"