- By design, TVIX should hit $0 if there is no reverse split.
- In this case, shorting appears appealing but poses a greater risk.
- A sharp move in either direction makes TVIX day traders’ favorite.
By design, TVIX is most suitable for day trading. Based on the market conditions, shorting VelocityShares Daily 2x VIX Short-Term ETN (TVIX) would be a more preferable choice at this time.
iPath S&P 500 VIX Short-term Futures (VXX)
TVIX is an exchange-traded-note (ETN) that tracks an index of future contracts on the Standard and Poor's 500 (S&P 500) VIX Short-Term Futures index. It is closely tied to twice the daily return of VIX futures. According to one research report, “historically, the VIX only moved opposite the SPX 88% of the time. So this means there is still a 12% chance that the negative correlation will not materialize. So, unlike hedging with index puts, the protection is not 100% guaranteed.”
By design, the long-term expected value of the TVIX long positions is zero. If one would hold long positions in TVIX for long enough, losing the entire investment is very possible.
The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment - TVIX Prospectus.
TVIX is known for its wild run in either direction, especially when the fundamental news comes up such as Fed news releases or other events. The Put/Call Ratio is an indicator that shows put volume relative to call volume. Put options are used to hedge against market weakness or bet on a decline. As of June 30, 2017, a CBOE VIX Volume Put/Call ratio of 1.02 (VPCR) suggests a bearish sentiment.
Is Shorting way to go?
As we can see from the chart below, longs must be consistently losing money. One would think that TVIX should be the easiest short, however, it doesn’t work that way.
The first question that should come up is if short can happen or not; however, TVIX is not easily available to short. I imagine most brokers won’t have TVIX on their inventory. TVIX poses a greater risk of shorting because TVIX is predisposed to being highly volatile. If you are holding a short position and the price goes up (i.e. 20%), you would most likely get a margin call from your broker unless you have enough funds on your margin account. Either you need to cover it for a loss or add more funds. Absent of an option chain, TVIX poses a greater risk in terms of shorting. As I mentioned above, the protection is not 100% guaranteed by hedging the index calls or puts.
On the other hand, instead of shorting TVIX, one would buy the VelocityShares Daily Inverse (XIV). As we can see from the 6-month price chart below, TVIX performed -76% against +70% XIV. This is an alternative option of shorting TVIX.
Generally, TVIX is most suitable for advanced traders since it poses greater risks on either the long or short side. Even though its short appears appealing, it poses a much greater risk. If I want to short TVIX, I would watch it very closely. Overall, TVIX is not suitable for holding long-term. Based on my analysis, I would short TVIX or buy XIV.
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