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Alan
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Some volatility products may terminate tomorrow

February 6th, 2018, 2:28 am

With the big jump in volatility today (VIX up over 100%), the short volatility etf XIV may liquidate tomorrow. 

The indicative value fell from about 73 to 4 after hours today (Fund indicative NAV falling from $1.6 billion or so to $63 million over the last full day!).
The fund sponsor (Credit Suisse) has the option to terminate after an 80% drop in said NAV. In effect, it is a way for them to protect themselves
from their inability to make a margin call on the investors in the fund. (It also looks like the biggest investor was CS itself, although they
may have some offsetting positions).

 But the subsequent (unprinted) NAV has fluctuatedly dramatically I'm sure throughout the night. 
 And the futures have fallen at this writing from the higher values that generated the closing 4 NAV print. We'll see what happens...

In any event, that kind of move in the NAV seems a day for the record books, even if the fund recovers. 

If it does liquidate, I hope they recapitalize it quickly and re-launch -- I like that one ...

Some discussion and links here

There was a famous dictum in particle physics by Murray Gell-Mann:
"Everything not forbidden is compulsory". 
I guess this is kind of the financial version of that. 
 
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bearish
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Re: Some volatility products may terminate tomorrow

February 6th, 2018, 3:33 am

I was wondering whether some calculations were breaking down late this afternoon. According to Bloomberg, the VIX did a sudden jump from 30 to 35 and then wobbled for a bit before drifting up to 38 or so and settling on 37.32. The VVIX went to an all time high around 200, with even more vigorous wobbles, before settling at 177.34. Somebody lost real money today. And I'm not referring to those people long Beanie Babies 2.0 (aka Bitcoin).
 
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Martinghoul
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Re: Some volatility products may terminate tomorrow

February 6th, 2018, 10:06 am

VIX keeps going up this morning...  Now appears arnd 40.
 
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Edgey
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Re: Some volatility products may terminate tomorrow

February 7th, 2018, 11:13 am

How do banks like Credit Suisses hedge their "short volatility etf XIV" products?  
I presume they sell options at various strikes and maturities, but how do they control the basis risk?
 
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ppauper
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Re: Some volatility products may terminate tomorrow

February 8th, 2018, 11:02 pm

Cramer blames this week's crazy market on a 'group of complete morons' out speculating
The wild market swings this week are largely due to the actions of a group of uninformed investors, CNBC's Jim Cramer says.
"A group of complete morons" who traded little-known, leveraged products that bet on volatility is "blowing up" everything, Cramer says.
 
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trackstar
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Re: Some volatility products may terminate tomorrow

February 8th, 2018, 11:17 pm

More intelligent commentary on XIV can be found elsewhere.

It also seems that Cramer has not heard of Skynet.

Quite a chart though:

https://www.bloomberg.com/quote/XIV:US
 
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FaridMoussaoui
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Re: Some volatility products may terminate tomorrow

February 9th, 2018, 6:00 pm

How do banks like Credit Suisses hedge their "short volatility etf XIV" products?  
I presume they sell options at various strikes and maturities, but how do they control the basis risk?
Here a good discussion on what happened to XIV and how CS do their hedging: Inverse Volatility Products Almost Worked
 
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Alan
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Re: Some volatility products may terminate tomorrow

February 9th, 2018, 10:25 pm

How do banks like Credit Suisses hedge their "short volatility etf XIV" products?  
I presume they sell options at various strikes and maturities, but how do they control the basis risk?
Here a good discussion on what happened to XIV and how CS do their hedging: Inverse Volatility Products Almost Worked
Excellent discussion -- thanks for the link.

Reminded me of the Navy review panel at the end of  the movie "Crimson Tide":
My primary concern here...is the breakdown in the system.
In this instance, the system failed because the two senior officers did not
work to resolve their differences while preserving the chain of command.
Now you may have been proven right, Mr. Hunter...but insofar as the letter of the law is concerned...
you were both right. And you were also both wrong.
This is the dilemma that will occupy this panel, this Navy...
and this country's armed forces as a whole...long after you leave this room. 
Off the record, you've both created one hell of a mess. 
(Italics mine). So, one can suppose that the CBOE and the various volatility product designers must be brain-storming like mad about this event.  
 
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bearish
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Re: Some volatility products may terminate tomorrow

February 9th, 2018, 11:24 pm

A return of 8% per month (give or take) on a product that mechanically rolls liquid futures contracts suggests that one is short something potentially very unpleasant. That whole free lunch thing again...
 
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Alan
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Re: Some volatility products may terminate tomorrow

February 9th, 2018, 11:53 pm

XIV has never been particularly close to a free lunch; the historical Sharpe ratios have been under 1. Page from my book:

Image

Needless to say, the statistics to fund termination will be quite different!
 
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ppauper
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Re: Some volatility products may terminate tomorrow

February 14th, 2018, 11:04 am

 
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chika
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Re: Some volatility products may terminate tomorrow

February 15th, 2018, 10:08 am

 
I presented a detailed analysis of what happened on Volatility Black Monday:
https://artursepp.com/2018/02/15/lessons-from-the-crash-of-short-volatility-etfs/
the feedback is welcome
 
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ppauper
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Re: Some volatility products may terminate tomorrow

February 15th, 2018, 8:16 pm

 
I presented a detailed analysis of what happened on Volatility Black Monday:
https://artursepp.com/2018/02/15/lessons-from-the-crash-of-short-volatility-etfs/
the feedback is welcome
thanks artur