Hi everyone, my question is related to SVXY - I'm well aware of its mechanics, but I was looking at specific scenario... Let's suppose we see something of a -80% or -85% drawdown in SVXY in the future (simulated 2008 had a -90% DD). 1) Are there any risks in establishing a long stock position? 2) Is there a more "efficient" way to fade VIX spike/Elevated VIX? Even with long stock - timing is everything (-80% DD vs -90%DD translates into 5x vs 10x difference in return, if rebounds back to ATH). Long ATM calls could be a possibility, but then we would also need to combine the ETF price with its IV... I appreciate any input.
(1) One risk would be possible termination of the ETF, I think if VIX futures increase 80% overnight they will suspend the fund and liquidate what's left. I've seen arguments on both sides about the likelihood of such event. (2) Unlikely that you will be able to time an exact bottom and if you are holding for the long term be prepared to stomach the volatility and suffer double digit drawdown's. The link below is to TT video that looks at the various ways of playing a vix spike above 20...its Tasty Trade so not sure how legit the 'research' is but at least they looked at it. https://www.tastytrade.com/tt/shows...vix-credit-spreads-vs-inverse-etfs-12-16-2016
"I think if VIX futures increase 80% overnight they will suspend the fund and liquidate what's left." No. It is true for XIV, but not for SVXY. For VIX futures to increase 80% overnight, VIX need to increase 200% overnight. In history, VIX never increase 50%+ overnight.
One concern will be that the ETF will become disjointed from NAV. The futures will trade but a circuit breaker can stop the mechanism which keeps market vs NAV in line.
If vol drops back down quickly you could make a great return from buying it after a huge drop. Or you could lose quite a bit. Simple explanation is everyday the curve stays inverted the fund is losing money from its daily roll (buying the next month). So if it takes it a month to cool off, the etf will probably lose quite a bit of value in that span.
The dates are obviously wrong, but yeah...simulated based on /VX values at that time...which would be quite different these days, given the size of short vol complex and de-leveraging which would occur... It's impossible to time the exact bottom - I would rather look at the duration/severity of the vol spike...which would contribute to the cheaper prices in the ETF...for the obvious reasons. So, the DDs are inevitable - I've experienced -20% and more in these instruments. Shouldn't be a big concern, given their mechanics. I'm not sure, how reverse split would influence the returns of a position/DD of the instrument. This is interesting - I believe the same issue was experienced by TVIX a long time ago...would it "correct itself" or how significant could it be? Paper losses are inevitable, -20% is the minimum to prepare for. Part of the trade is about quick drop in vol from the spike, part of it is about a slow/grinding decrease in overall volatility levels/term structure...What I like about the ETF vs. option spreads - is this ability to consistently short elevated VIX/VX complex over a long period of time.. In terms of the inverted curve...seems to be a common/popular belief, but I've always attributed the VXX/UVXY losses to the overall /VX curve levels vs. VIX. Why does it lose value? It buys second and sells front; in a stable environment 2nd /VX is typically priced 2-3 points above the spot @ settlement, which are lost by the ETPs...I've found it to be useful to do a very simple estimation of prices, at which the ETP acquires 2nd month - which is typically 5% on any given day.
Yeah that's why those go down and XIV/SVXY go up when the curve is normal/things are calm. Check out vixcentral.com it's a pretty useful site.
I guess you can also relate this to the shape of the curve...yeah, vixcentral is vital for doing anything with /VX and its ETPs..