In addition to short VIX futures exposure, SVIX started holding OTM VIX calls. As of today, it is long 24,000 Jan VIX calls at 26 strike. If that position doesn't go ITM, it costs about 0.5% of the ETF's NAV per month. If it does go ITM, the ETF will have lost 85% of NAV already, and the options position won't be big enough to compensate. What am I missing?
It sounds to me like it’s a requirement from their custodian or something like that. Most probably they want to prevent it from going negative and they pass it onto their clients regardless
This is what Volatility Shares said officially: "As described in the prospectus, SVIX may invest in options and other financial instruments. Although the Fund has recently begun investing in options, the investment objective remains the same — to track the daily performance of the Short VIX Futures Index (Ticker: SHORTVOL). There may be times when regulatory or clearing constraints mean the fund may hold options in order to maintain its -1x exposure." Clearly this means that their custodian is requiring it so it doesn't go negative (it's technically not a perfect hedge since if VIX goes to 26, the futures won't go all the way there, so the VIX 26Cs will be ATM but SVIX's futures won't have gone to 0) FWIW, it does soften the losses a bit when VIX spikes, since those options will start blowing up pretty quickly. The question becomes do they then roll the VIX 26 calls into VIX 52 calls? Those should be pretty cheap and not be a big issue. Now if they have to keep VIX 26 calls on at all times....then it's gonna be costly for sure. So far the monthly cost is coming in around 70-80bps. Would be much better to trade SVXY but I don't know anyone that allows to trade it on margin, so it's not possible to replicate SVIX exposure with 2x SVXY (not to mention that with high margin rates these days, you're going to pay much more than 75bps per month to hold the 2x SVXY)