Published: Fri, February 09, 2018
Markets | By Terence Owen

The ProShares Short Volatility ETF Lives To Fight Another Day

The ProShares Short Volatility ETF Lives To Fight Another Day

The last day of trading for XIV is expected to be Feb 20.

There are other clues in the case - notably that the big fall in stocks hasn't yet significantly affected other asset classes.

"Really the scrutiny will be around how they were sold and who they were sold to", he said. "These guys have taken volatility to the next level and believe it needs to be part of a managed portfolio".

Those funds are inversely linked to the VIX, a gauge of turbulence in the market. Altogether, estimates for the space are anywhere from $1.5 trillion to $2 trillion.

The intensity of the selloff is likely to keep investors from quickly piling back into short volatility bets, market participants said.

The trading range for the VIX, or the Cboe Volatility Index, on Monday was 17 points, much wider than the 10-point range the day global markets were shaken by Britain's vote in June 2016 to leave the European Union.

Months of extended calm in the stock market has made selling volatility a lucrative affair.

For a long time, shorting the VIX was a profitable trade.

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The problems these tracker funds are facing should not cause permanent damage to the broader market, investors said, as the total assets under management pales in comparison to the broader options market and equity market overall.

AUM for them is about $250 billion, according to SocGen data through 2017. On Monday, the index ended up 20.01 points at 37.32, its highest close since August 2015.

For the Dow, the fall at one point of almost 1,600 points was the biggest intraday point loss in Wall Street history.

Credit Suisse announced a redemption of its Vix short-term exchange-traded note later this month after the rise in market volatility led to the note losing more than 80 per cent of its value, triggering a clause allowing the Swiss bank to shut it down.

"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.

The Financial Industry Regulatory Authority has cautioned about volatility-linked ETNs and other exchange traded products. And for more than a year, they couldn't lose. One of the most popular time frames using RSI is the 14-day. For example, variance swaps are derivative contracts that make a bet on the magnitude of movement on the underlying asset. Analysts at Goldman Sachs Group Inc., agreed, noting that the volatility complex was effectively long vol after Monday's big move.

"The last two days of trading has thrown a giant bucket of cold water on the short volatility trade and I think we're now in for a prolonged period of elevated volatility generally", said David Lafferty, chief market strategist at Natixis Investment Managers.

iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA VXX) traded down $0.49 during midday trading on Wednesday, hitting $42.39. So when volatility spiked by a record 116% on Monday, the funds plummeted. That sits at roughly $8 billion vega.

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