What would take XIV down to 0?

I

iggy9807

Not an options question per se, but this is probably the best place to ask. How much of a daily drop in SPY would take XIV down to 0?

I know it has a beta of 3 vs SPY so in theory, it would take a 33% daily drop in SPY (that seems unlikely, I'd like to think a 20% drop is the worst that can happen).

At the same time, XIV also has a beta of -0.5 vs ^VIX which means a 4x spike in ^VIX (say, 15 to 60) would wipe out XIV. Such a ^VIX spike doesn't seem that far out. I imagine a 10% drop in the market that comes out-of-the-blue, can easily create this kind of fear.

Is there a better way to analyze this? I just want to know how much money I am willing to keep in XIV.
 
Quote from cdcaveman:

If your not willing to get cut into an eight and buy more I wouldn't be in this product
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VXX is a completely different story. It can only go to zero if VIX itself goes to zero which is not going to happen (unless the government buys into the market or something).

I did find the termination condition for the XIV:
http://sixfigureinvesting.com/2011/06/ivo-and-xiv-termination-events/
So looks like it can't lose more than 80% in a day. They'll just kill it before it happens. I wonder what they would do if XIV went to zero over night.
 
thanks iggy.. interesting a termination event.. let me know if they get near it.. i'll invest haha.. its just possible that the curve could invert such that it would cost the fund more money then it had liquidity.. in such an event similar to if you were short front month futures you would have an account with a debit.. i'm not into that myself :) haha i've always wanted to look at how well the pricing is on options on these products.. because you do realize they are third order derivatives at that point.. they are an exposure from a rolling of futures contracts in which contango and bacwardation have at most times stronger tides they the actual direction of volatility.. and options on those etfs can not possible figure exactly right that changing curve we all love so much.. there is no better example of a non-linearity..
 
I sent my son to Chicago for the CBOE's course on VIX, and in the materials he came back with it flatly states that there is a chance XIV will go to zero on any given day. I'm sure it could happen, regardless of what the prospectus might say.
 
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