SVXY - The Volatility Party is Over

March 17, 2018

With the XIV exchange traded note gone, fans of trading inverse volatility will be looking to SVXY as an alternative. Unforunately on February 27, ProShares has announced that they will reduce the leverage in the SVXY product from 1 to 0.5. This means that whereas before SVXY tracked the inverse daily moves of the CBOT VIX futures month 1 and 2 contracts 1-to-1, a move in the VIX futures values will now result in half that percentage move in the SVXY. So let's say that there's a 5% down move in the VIX futures contracts, the SVXY would only change in value by a 2.5% up move.

This change in leverage is a wise move for ProShares, the company issuing the SVXY security, because it means that an unprecedented move in volatility as we saw in early February is less likely to wipe out the fund's assets. But this is detrimental to investors looking to capitalize on contango and it's compounding effect on the security. Here's a chart I put together showing what sort of gains you would get if you invested $100,000 in SVXY and held for 30 days while contango was at 9% from the month 1 to month 2 rollover and the average value of the VIX contracts remained the same.

Figure 2

You actually get a little bit more than a 9% return because the investment compounds. At 50% leverage, you will make 4.4%, less than have the return. I tried experimenting with what would happen if you tried to compensate for the lower leverage by doubling your position size in SVXY. As you can see in the third column, it's not quite the same because there's less compounding and you fall short in nominal return.

Doubling your exposure in SVXY to achieve the same return is dangerous because you have more capital at risk. Have a look at this chart depicting 4 consecutive days of 20% rise in VIX future contracts. At 100% leverage, SVXY starting at a value of 100 would decline 20% per day, ending the 4-day streak to end at a value of 40.96. At 50% leverage, the decline woudn't be quite as bad as it would end at 34.49.

Figure 3

But let's say you doubled your exposure, trying to replicate the same old returns. In this type of multi-day decline you would nominally lose more dollar amount (68.78) versus the 59.04 you would have lost with the old SVXY. That's about a 16.5% higher loss than you would have gotten before.


It seems that XIV/SVXY was too good to be true. Thanks to the demise of XIV and change in leverage of SVXY, never again will we have such a good vehicle for profiting from the VIX futures contango. Your best bet going forward for this kind of trade is to short VXX… but use position sizes wisely and hedge to protect your account from margin calls!

Was the XIV & SVXY Blow Up Caused by Malicious Market Manipulation?

February 6, 2018

Yesterday the popular inverse volatility funds XIV and SVXY both imploded in the afterhours market. Due to the decline, Credit Suisse is recalling the XIV note. Meanwhile, SVXY opened for trading down over 80% from yesterday's close. All of this happened due to the largest single-day rise in the VIX ever seen in its history.

Here is a chart showing the biggest VIX spikes since its inception. Note that on 8/24/15 the VIX also had a very bad day, but the inverse funds did not blow up. I believe this is because XIV and SVXY's intrinsic value is derived from the CBOE traded VIX Futures contract, which correlate to VIX movements but tend to lag somewhat.

The spike in the VIX was insanely unusual because not even during the 2008 financial crisis have we seen such a large intraday move. Since the VIX value is derived from the premiums of stock options, could algorithmic program trading have contributed to this unusual rise?

What I found personally alarming about this event is that these securities closed down business as usual on a declining day for the stock market. It was a losing day, but at the close there was no indication it would be a day that the fund would lose all of its value. The destructive event happened in the after hours market, when the VIX futures, which are held by both funds, suddenly spiked, causing a liquidity crisis. Because both XIV and SVXY emulate the daily returns of being short the VIX futures, a 100% increase pretty much wipes out the value of these funds.

At 4pm ET the February CBOE VIX Futures contract was trading around 22, but immediately after the close there was a sudden spike to 33, which is what broke the XIV and SVXY.

What I find so strange about this is that yesterday's decline in the stock market was not unusual for a correction by any means. Yes, it was harsh, but the S&P 500 index has seen much worse down days without a volatility spike like this (especially in the afterhours). Could it be that the XIV/SVXY was specifically targeted for breakage? Was someone sitting on a lot of money waiting for a day with a volaility spike to push the futures over the edge, beyond a 100% move in the afterhours when the trading volume is light? Traders with size do this all the time. Sometimes big traders will nudge individual stocks or indexes to certain price points to take out the stops of other market participants, causing larger moves or taking advantage of the liquidity for a trade positioned the opposite way. It's not inconceivable that the VIX futures was targeted using a similar scheme.

Whether or not this was the doing of a bad actor, because this happened it will probably happen again. Credit Suisse not plans to recall the XIV ETN, but it was such a popular product that I have no doubt it will return soon in some form. Thankfully, the bank was fully hedged. I hope that when it does comes back, they will have some protection in place to safeguard against this type of after hours event from repeating.

Shut Down of and

September 5, 2017

I am temporarily shutting down my websites and I initially thought these websites would generate sufficient traffic to be self-sustainable from ad revenue, but at the moment they are unprofitable. Both websites require their own databases and run via Docker containers hosted on AWS, which gets costly. I will put the websites back up as they were once I find a more cost effective hosting solution.