In your opinion, what does this blog need more of?

Wednesday, May 10, 2017

$VIX noos


FT Alphaville - remain weirdly quiet as Satan laughing spreads his wings. Oh, lord yeah!:

The Vix — flawed measure of fear that it is — has fallen to another low, closing at its lowest level since 1993.

With a helpful picture of what the $VIX at its lowest level since 1993 would look like.

What freaks me out is that people who pass themselves off as institutional investors think it's perfectly okay to buy a synthetic short $VIX futures ETF like XIV - and then hold it.

Yes, holding XIV (or HVI.to in Canada) makes a lot of money, and "all you're doing is shorting time premium". That is all true. But there's still a risk problem with this, and an even worse market structure problem.

If you hold XIV, you need to realize you've got a 50% intraday loss riding on your books. Because XIV can drop 50% in a day if you get a $VIX spike. Check the charts. It's already happened a few times. Have you run a simulation to prove that your position is small enough to clear it without moving the market? Do you keep track of how large everyone else's positions are too, or do you really think you can be first out the door?

You don't have to know how XIV even operates, just read the goddamn prospectus! Why do they have that big section in bold saying "The Closing Indicative Value will be zero on and subsequent to any calendar day on which the Intraday Indicative Value equals zero at any time or Closing Indicative Value equals zero"? Or the part under "Risk Factors" (nice title, wonder what it means?) that they put in bold AND italics that says "Because of the large and sudden price movement associated with futures on the VIX Index, and the daily objective of the ETNs (including inverse or leveraged exposure), the ETNs are intended specifically for short term trading"?

Because XIV is actually able to lose over 100% in a day. It can do that because it's a short $VIX future.

And so the minute you get a $VIX intraday spike, and the loss on the ETF explodes, Velocityshares will try to wind it down before it goes negative. Which will mean buying back all of XIV's $VIX near and second month short position, during the day, during a spiking market. All this at the same time as Horizons is also selling HVI.to's $VIX futures. And while every other synth shop is selling theirs as well. And while the CBOE $VIX professional traders can smell blood in the streets.

That means an acceleration toward zero.

And because your position gets closed out right at the peak in $VIX, your loss gets capitalized. YOU DO NOT get to get back into the market to ride XIV back up, because IT'S CLOSED.

It doesn't matter what price you bought at, the potential of your XIV position going to $0 the next time fear spikes should wildly screw up your risk profile no matter who you are.

And these XIV holders are the people who bid down $VIX futures.

Then again, I do still think that if it were a true unbalanced elephant-in-a-kiddie-pool trade, someone would be able to make a bloody fortune on the other side. And there must be a few hundred quants out there that have already looked at this, it's a frickin' gimme.

Hopefully none of them have thought about starting an artificial run into $VIX near & second month to force XIV down and precipitate a loss. Hopefully it's not possible to sell a XIV position short. Hopefully there are no Russian quants who've read the Financial Times' XIV warnings over the past 2 years who work in an "economic warfare" subdepartment at the GRU, because it will only take a few billion dollars to spike $VIX to 80 and crash the S&P 500, as long as XIV as part of the market structure.

In fact, they could slowly build a $5B XIV position, then take $100B of the central bank's money and buy OOTM near puts on high-beta NYSE stocks when SPY's RSI is >70; then pull the trigger, dump the XIV position as a sacrifice to trigger a market run, and clean up on the puts like a mofo.*

And then Pooty-Poot will give them a fucking medal for bringing down American kapitalizm.

If you own XIV as a hold, you're holding a potential goes-to-zero-then-things-get-worse position. You are an idiot and should kill yourself right now for the benefit of humanity.

I do love trading HVI.to (Canada's XIV): but I trade it, only after the intraday has spiked and the futures have gone back into contango, and once I get my first 10-20% I cut back, and once I've made 30% on the rest I sell and walk away.

If people keep piling into XIV, this will become the next financial weapon of mass destruction. You heard it here first.



* - Then again, maybe Pooty-Poot would be able to launch the same attack even if XIV never existed, just by selling $VIX futures directly at the CBOE? I'd be happy to hear an explanation of why he could, because that would make me sleep a lot better.


No comments:

Post a Comment