XIV and SVXY: possible liquidation by issuer

jimmyjazz · Feb 5, 2018

I took on a small long (call) position on SVXY today, but hedged it with shorter-expiry puts at 2X the delta when it seemed like things were going south. In the event of termination, the calls are obviously worthless. The puts should be at max value . . . but I have a feeling I'm gonna get screwed. Am I?

It's not a big number in terms of my total investment, so I could handle it all just vanishing, but it would be a pretty nice gain if the puts paid out at $0 SVXY. I just have this feeling they won't.

Clubber Lang · Feb 5, 2018

jimmyjazz said:
I took on a small long (call) position on SVXY today, but hedged it with shorter-expiry puts at 2X the delta when it seemed like things were going south. In the event of termination, the calls are obviously worthless. The puts should be at max value . . . but I have a feeling I'm gonna get screwed. Am I?

It's not a big number in terms of my total investment, so I could handle it all just vanishing, but it would be a pretty nice gain if the puts paid out at $0 SVXY. I just have this feeling they won't.

Can’t you just buy some SVXY common right now (last I saw an hour ago it was trading mid teens) and lock in some solid gains?

beerntrading · Feb 5, 2018

S2007S said:
So the fund shuts down for good?
I was reading that xiv was a very big money maker for velocity shares...

Honestly, I don't know. My knowledge of this dates to 6:51 when Arnie posted the answer to the questions I asked moments earlier. But my take on it was that they would rebalance contracts as usual after stopping out.

I really would appreciate someone with direct knowledge of this chiming in though.

jimmyjazz · Feb 5, 2018

Clubber Lang said:
Can’t you just buy some SVXY common right now (last I saw an hour ago it was trading mid teens) and lock in some solid gains?

Not sure I understand. Why would I want to take on a long position on something that might be worthless tomorrow? I'm concerned they will abdicate their responsibility on the puts, which by all means FEELS wrong, as they clearly knew the $ risk at $0 SVXY, but somehow the little guy is always the one taking it in the shorts.

fhl · Feb 5, 2018

This article:
https://www.forbes.com/sites/petertchir/2017/07/24/how-high-can-vix-go/#23c6df321417

...says xiv has the 80% termination clause, but svxy does not have the same termination clause. Although the issuer of svxy will probably try to terminate also.

The way I read this whole thing, xiv is shutting down and svxy is most likely shutting down.

m22au · Feb 5, 2018

jimmyjazz said:
Not sure I understand. Why would I want to take on a long position on something that might be worthless tomorrow? I'm concerned they will abdicate their responsibility on the puts, which by all means FEELS wrong, as they clearly knew the $ risk at $0 SVXY, but somehow the little guy is always the one taking it in the shorts.

Who is "they" ?

The OCC is responsible for determining what happens when a stock is delisted from a major exchange and/or cancelled. In almost all situations where a stock is cancelled completely, owners of puts can exercise their puts and deliver nothing to the put seller.

But if you wish, you can buy SVXY at $15.00 and then you know for sure that you can deliver it to the put seller at expiration.

.

jimmyjazz · Feb 5, 2018

Thanks. It's that "in almost all situations" thing that makes me wary. I expect it will play out the way you say, though.

S2007S · Feb 5, 2018

Looks like it's showing a $4.88 nav on their site....

fhl · Feb 5, 2018

As of sept 17, cs owned 5 million shares of xiv and they've lost 500 million dollars as a result. They may also have further exposure being the issuer liquidating this security as they still have to buy in futures to liquidate. (as i understand it)

And this may explain the late day selloff in the broad mkt as it became clear this kind of thing was going to happen and would effect a number of different strategies funds employ.

beerntrading · Feb 5, 2018

Well, read up on this some. It looks like they will just do an accelerated maturity (more clearly defined in prospectus). Applicable language is on pages PS-44 and PS-45 and specifically subparagraph (d). It's definitely uncharted territory here, so let the trailblazers blaze.

It sounds like you'll receive the redemption for early maturity based on its value.

But it's worth noting they have the "option, but not the obligation" to accelerate maturity. Given that this very well may be termination panic driving prices lower, and not an actual underlying shift in the market (though it's conceivable if they tried to offload the futures it would hit the underlying), they may elect not to mature early and allow for a possible recovery during RTH tomorrow.

Beyond all that, I'm sure it breaks down elsewhere in the prospectus exactly how payment on maturity is to be handled--but that's above my pay grade and interest level being that I have no dogs in this fight. I hope I've at least offered a jumping off point to figuring out how this all works.

Prospectus: http://app.velocitysharesetns.com/f...Final_Pricing_Supplement_AR46_long-form_1.PDF