Stay Away from Volatility Products Like the VXX and XIV

09 February, 2018, 07:05 | Author: Shannon Aguilar
  • 2 red-hot investment products just blew up, erasing almost $3 billion in minutes

The biggest rally ever in the Cboe Volatility Index (CBOE) is raising thorny questions about the future of exchange-traded products tied to the gauge.

The fund, the VelocityShares Daily Inverse VIX Short-Term ETN, has been wildly popular in the past year as volatility on American equity markets sank to historic lows, delivering an eye-popping return of more than 187% last year.

That all changed in a hurry Monday when the Dow Jones Industrial Average sank as much as 1,597 points on its way to the worst percentage loss since August 2011.

ETNs are not exchange traded funds. A late-session spike on Monday proved to be the undoing for the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and the ProShares Short VIX Short-Term Futures ETF (SVXY), each of which is created to provide single-day returns that are the inverse of the VIX.

One of the hottest trades in recent memory, shorting volatility, evaporated in a heartbeat Monday. And market participants knew it. Opera Trading Capital owned approximately 0.09% of Credit Suisse AG - VelocityShares Daily Inverse VIX Short Term ETN worth $1,356,000 as of its most recent SEC filing. A move above 70 is widely considered to show the stock as overbought, and a move below 30 would indicate that the stock may be oversold. And for more than a year, they couldn't lose.

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It was a theory echoed by Barclays Plc analysts in a research note published after Monday's sharp spike in the VIX. The act of measuring volatility has exacerbated the swings of both the VIX and the market.

Adding to the angst is the sobering fact that neither market strategists nor money managers nor bankers who've structured these products are quite sure just how big and pervasive the market is.

Taking a deeper look into the technical levels of Benakat Integra Tbk (BIPI.JK), we can see that the Williams Percent Range or 14 day Williams %R now sits at -91.30. As the VIX moves over 20, there is more risk entering the market. The CBOE's Exchange Volatility Index, commonly called the VIX, was supposed to make the market less volatile by giving investors a better picture of the possibility of a stock drop and the ability to hedge against it.

But even as 2018 kicked off with soaring stocks and subdued volatility, signs of complacency in short-vol land had cropped up.

The was an inverse bet on volatility, in this case, a basket of volatility futures (the two front-month VIX futures contracts). About 90.27 million shares traded or 98.33% up from the average. iPath S&P 500 VIX ST Futures ETN (NYSEARCA:VXX) has declined 76.63% since February 8, 2017 and is downtrending. The pick-up in stock market gyrations early last week drove more people to bet on subdued stock market gyrations, said Anand Omprakash, director of equity and derivative strategy at BNP Paribas in NY. "If you're going to play the short-vol game, basically the goal is to just stay alive and avoid any circumstance where things can go up in smoke in minutes".

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