TVIX: Long Or Short?

Summary

• 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.

TSource: Finviz

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.

Source: Tradingview

Source: Barchart.com

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.

Source: Tradingview

Conclusion

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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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[wjen49jd]

What I find interesting is there's so much discussion about how heavily shorted VIX ETFs are and all these retail investors are so short VIX. However, if you actually look at the data for all the big ETFs like UVXY, TVIX, VXX etc...ALL the short interest ratios are less than 1. So many people just focus on the dollar amount short, but that neglects the fact that the daily volume traded of these products keep increasing. A short interest ratio under 1 is hardly heavily shorted at all. Thoughts?

[manfmnantucket]

just scaled out of my tvix short (from $23.3) at 18.65, since VIX is below 9.75 , where it doesn't stay for long. Also it's Friday afternoon and we often get some pop in VIX as traders buy protection for the weekend.

I'll probably miss some further drop, but look to get back in on TVIX spike above hourly trendline around 20

[Vol__Trader]

well done. The sudden massive drop in the VIX has us shorts cleaning up house. I closed my naked calls on VXX today myself. Reached a 82% profit in under a week. Good enough for me lol

[murdaneta]

Oh! Dear Yellen! Old man (woman) fools ought not be in charge of the "money"!!! Neither should wolfes (Cohn!)!!! This it's going to hurt!!!

[manfmnantucket]

I should add that my tactical trick to cover (pun) my TVIX short is to hedge long with UVXY.
So today TVIX is moving above my average at around 22.75 - and I'd like to be able to "average up" on any large spikes in TVIX, to increase my position size and improve the entry price.

So I have a 'boxed' position at the moment, going long UVXY at 10.40, since tomorrow is a Friday before a weekend when rump is abroad, since VIX has been rising, and contango diminishing. If TVIX rises so will UVXY, and I'll have a profit on UVXY to counter the loss in TVIX... I'd be able to scale out of UVXY and add to the TVIX short at a higher price.
If they both fall, I'll have a loss in UVXY but concomitant gain in TVIX, and I can realize some of both, until I'm more confident that the spike has passed.

[Eric Peterson]

I don't understand the point of being short TVIX and being long UVXY at the same time. Their price performance is practically identical. Is it just because it's difficult to find shares to short TVIX, so you don't want to cover any of the short shares you have? Or trying to avoid the 3-day settlement limits?

Kind of like being long SPY and short IVV. I don't see the point.

[manfmnantucket]

It's an old-fashioned technique actually, known as a 'boxed position'.
My net gain is 0 while boxed, but I can average down on the losing position while taking profit on the winning position.

So for example, I'm long UVXY at average 10.40, and have a 0.60 profit on that leg. But my TVIX short went a bit red, which is OK. My longer-term plan is to have a nice size TVIX short from a high entry point, so I added to the TVIX short to bring its average up to 23.20.

And, I can sleep. Suppose we wake up tomorrow with TVIX at 35.
Instead of fretting about the TVIX short loss and wondering if I should stoploss, I'll have the same % gain in UVXY, so I can calmly add to my TVIX short on the nice spike, and sell UVXY once it looks like the peak is past.

[Eric Peterson]

"And, I can sleep. Suppose we wake up tomorrow with TVIX at 35.
Instead of fretting about the TVIX short loss and wondering if I should stoploss, I'll have the same % gain in UVXY"

Well, you could also just have no position, and when you wake up and see TVIX at 35, short it. :) You would also sleep well the night before. I don't see the difference, except for extra commissions and extra margin requirements. And a risk your short shares get called away at any moment.

Yes, I've heard of "shorting against the box", but that's usually for tax purposes or to avoid wash-sale rules.

[jz30]

manfnantucket wrote:

"My big fear, though, is that with TVIX and similar instruments being the most-shorted symbols out there, that a day of reckoning is coming soon, where VIX will elevate high enough to create backwardation, then the mother of all short-covering panics will blow it all sky high :-( It's just been too good to be true so far."

What do you define as the mother of all short covering panics, in % terms?

[Research & Investment]

100%?

[manfmnantucket]

well, it's easy to imagine scenarios that would spike VIX back to 21 or 22, where it hit last Nov due to the US election. (rump abroad and Kim nukes something or ISIS hits G20 with dirty bomb)

That's roughly doubling from where we just were. And let's say there's a similar mild correction in SPX of 5%, or roughly 125 point drop. What should that do to TVIX? TVIX is designed to track VIX intraday; let's say TVIX doubles to 46. And at some point, the spot VIX rises above the futures, creating 'backwardation', so TVIX starts selling front futures higher than the price it's buying longer futures. This means that TVIX price is no longer prone to sink overnight - rather, it can skyrocket.

But at 21, VIX is only a bit above its historical mean around 18.8.
So, the 'nightmare scenario' that worries me is more about the TVIX scheme breaking down when liquidity fails. So let's say there's further trigger for panic. rump has tantrum and nukes NK, or is caught fondling Yellen.

VIX lurches up to 30, 35, 40. SPX crashes another 150 pts.
But at some point along this rise, with so many people short TVIX, there's a buying panic to cover and go long - and suddenly, no more TVIX shares available to sell or sell short. What happens? Well, possibly TVIX starts massive buying of futures (to create new shares), pushing futures value up as well, creating a feedback loop.

What happens then?
Is there a way TVIX and SVXY can 'break' due to liquidity crisis?

[Research & Investment]

If you can, you can confidently short TVIX (I would watch it very closely).

[Eric Peterson]

What exactly does "watch it very closely mean"? Are you going to cover the short at some specific price? If so, which price? When it triples? Or quadruples, as it did in August 2015?

Don't get me wrong, I am short volatility. I'm pointing out the lack of a plan here.

[Research & Investment]

I would take the 10 ~ 20% gain . However, the trend shows that one could hold it for longer. By design, TVIX should hit zero if there is no r/s (100% gain).

[Eric Peterson]

Yes, my question is on the upside (losses on the short position). Do you ever quit the short position, or just let it ride even if it quadruples in price? In that case you need a lot of extra cash sitting around to support the position. If you short $10k, you better have $40k cash to support the position if it quadruples, so you don't get forced out at exactly the worst moment, and have a 300% loss versus your long-term maximum profit of 100%.

Or you need to pick some level to put a stop-loss, say TVIX up 100%, which over the past two years it has done a couple times, causing a stop out.

[vxx shorty]

So if i understand you correctly, the only "great risk" in shorting tvix is unable to cover a margin call in a super pop. But what if you can?

[amateur_investor_]

The other risk is an unexpected buy-in from your broker

[itscalledcommonsense]

You didn't bet enough?

[Reformed.Trader]

I am a dividend growth investor and I trade vol on the side. Whats wrong with that?!

[Eric Peterson]

Sorry, but a rather sloppy article:

"Absent of an option chain, TVIX poses a greater risk in terms of shorting."

UVXY is about the same thing as TVIX (2x daily long 30-day volatility), has an option chain and has greater volume. You don't mention UVXY anywhere in the article. Why not?

"Based on my analysis, I would short TVIX or buy XIV."

I don't see any analysis. Just a general observation that TVIX is designed to go to zero long-term, which everybody who trades volatility already knows. Volatility is historically low right now, the term curve is very flat, M1-M2 contango is small, making it very risky to go short volatility right now. XIV has gone up tremendously the past 18 months, and can drop more than 50% in a week in a market correction such as we had in August 2015.

I don't see any analysis in the article supporting the idea that now is a good time to go short volatility, versus some other time. In fact, many more advanced articles on volatility are saying that the risk/reward currently is not very good compared with the past year.

No mention of the word contango anywhere in the article, which is a must for discussing volatility trades.

"XIV. This is an alternative option of shorting TVIX."

Going long XIV has a very different risk/reward profile to going short TVIX, and you don't discuss the differences in the article. The only similarity between the two trades is that they both express a short volatility opinion. XIV is a 1x inverse fund while TVIX is a 2x long fund. Different animals, different performance profiles during market correction and market rallies.

SXVY is similar to XIV, but has options, while XIV does not. You mention lack of options as a drawback to trading TVIX, but don't mention UVXY and SXVY, which have options.

My conclusion from the article is that you don't have much experience trading volatility.

[Research & Investment]

This article focuses on shorting TVIX. Thanks

[Niederhoffer's Ghost]

Gotta love it, seemingly everybody's all of a sudden an expert on trading volatility these days...this poses a real world conundrum because axiomatically the majority of money must be positioned wrongly.

I predict Interesting times ahead , that's for sure.

[amateur_investor_]

Well I'd say more accurately most people are skeptical of short volatility as a trade. This is almost always the case whether vix is high or low. Confirmation bias kicks in and no matter what we get danger warnings. I think this is a good thing. Shows Most traders are not positioned short vol despite the persistent myth it's a "crowded trade." Truth is it's a trade that takes either knowledge or guts

[OuterBoxThinker]

I bought $100k worth of SVXY & $100k worth of UVXY 5 months ago. I'll close SVXY to realize 50% gain at the beginning of the market correction sometimes between Jul-Aug. Of course, UVXY would be down 50%, but I'll close the position either to break even or gain 10% or more if the market slips further. Any opinions?

[Vol__Trader]

Don't waste your money on Uvxy. Sell covered calls against your svxy position to collect massive premiums and if you feel real gutsy just buy a few $vix.x calls when the VIX is in the 9's. Make money both ways. Just my two cents

[Masmon]

By my calculation if you sold at todays prices you would have lost US$ 25,350 on this trade. SVXY up 33.78% UVXY down 59.13% over last 5 months.
UVXY is a dangerous vehicle, they don't call it the "widow maker" for nothing..

[itscalledcommonsense]

So you are net long $100k vega at beginning of trade and maintained that long bias for a long time in the face of volatility declining. Not really that wise.