Friday, 17 August, 2018

Volatile stocks spark record one-day rise in fear index

Are ETNs Highly Dangerous Products Are ETNs Highly Dangerous Products
Cristina Norman | 09 February, 2018, 07:06

"Many view the [recent] downturn as a necessity to the runaway equity markets and see it as an opportunity for investors to reinvest at more manageable levels", CMC Markets analyst Oriano Lizza said.

In an announcement, Horizons stated that the decision was made following its assessment of "the extreme volatility in VIX-futures markets that occurred in after-hours market trading yesterday". It wasn't supposed to be this way. The VIX surged on Monday, which roiled Credit Suisse's XIV product. They're known in financial circles by their ticker, VXX. As volatility-related products scrambled to buy VIX futures in order to rebalance ahead of their 4.15 p.m. daily deadline to calculate the value of their underlying assets - they effectively pushed up the price of the contracts and eventually the index.

More $3 trillion (£2.15 trillion) has poured into so-called inverse exchange traded notes (ETNs) linked to the Vix, or fear index, in recent years, as markets ascended and volatility all but vanished. But that's not the same as offering an investment product that shoots to 37 from 17 in a day. VelocityShares Daily Inverse VIX ST ETN (NASDAQ:XIV) has risen 166.34% since February 5, 2017 and is uptrending. Zacks Investment Research Want the latest recommendations from Zacks Investment Research?

All of this appears to have once again proved the observation effect. These inverse volatility ETNs are created to be reverse-levered to the VIX. To professional investment managers, volatility is measured in multiple ways.

That's because the measure has peaked for the year in February only once during its existence - interestingly, the only other time was during the market's early 2016 upset.

This has created a pretty big mess.

As it happens, however, the death of XIV wasn't just the predictably result of a collapse in the equities market, but a kind of suicide. It looked like a can't-lose proposition, so of course it did. The RSI is computed based on the speed and direction of a stock's price movement.

"(It's) impossible to verify, but you'd have to figure that the recent move has caught many of these people off guard and has added some volatility to the recent moves", said Matt Thompson, co-head of the Volatility Group at Typhon Capital LLC in Chicago. So when volatility spiked by a record 116% on Monday, the funds plummeted. Many traders will use the ADX alongside other indicators in order to help spot proper trading entry/exit points.

"Investors will receive a cash payment per exchange-traded note in an amount equal to the closing indicative value of XIV on the accelerated valuation date", said Credit Suisse, which won't sell new XIV notes after the buyback. Credit Suisse emerged as one of the largest issuers of the firm's ETNs, followed by UBS. Goldman Sachs predicted on Tuesday that much of what was betting against the VIX had been wiped out on Monday and that VIX investors were now betting heavily on a jump in the VIX, just in time for the VIX to fall on Tuesday. Investors may be mindful of any meaningful pullback or correction, and they may have a certain percentage in mind for when things seem to be getting out of hand. They have barely dipped their toe in the water.

24/7 Wall St. wanted to outline just how complicated the world of volatility and the "short volatility" can be. Exactly how much or the amount they sold is hard to know. But that has done little to stop the sales of volatility investments broadly.

Investors who have stayed on the sidelines may be considering if the markets will continue to rally higher.

Did volatility funds hurt the market? But don't hold your breath waiting for it to spring into action.

To some, the volatility complex feels like a monster that's been lurking in the shadows.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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