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Cantilever Of The VIX Curve And February 5th

REX Shares profile picture
REX Shares

The CBOE Volatility Index (the "VIX") seeks to measure the market's current expectation of 30-day volatility of the S&P 500® Index, as reflected by the prices of near-term S&P 500® options. Because S&P 500® options derive value from the possibility that the S&P 500® may experience movement before such options expire, the prices of near-term S&P 500® options are used to calculate the market's view on the potential rate and magnitude of movements, or "implied volatility," of the S&P 500®. However, the options used to calculate the VIX are constantly in flux. As a result, unlike many indices, the VIX is not an investable index and therefore VIX derivatives, such as VIX futures, are used to gain exposure to price movements of the VIX. VIX futures contracts with shorter maturities have tended to have a higher beta to changes in the level of the VIX while contracts with longer maturities have tended to have a lower beta to changes in the VIX. The reason is relatively intuitive: market uncertainty (or calm) today may imply market uncertainty (or calm) tomorrow, but not necessarily in six months or a year.

This dynamic is analogized by a "cantilever model." As the architects among us will recall, a cantilever is a beam with one end fixed and the other end freely moving. In this analogy, the fixed end behaves like the long maturity contracts. The free one like the short. Although the analogy is not perfect, it is helpful in understanding curve dynamics.

The Long Term View

In order to quantify the typical relationship between VIX futures contracts and VIX, the CBOE has analyzed data from March 26, 2004 through May 26, 2017, based on time to expiration. The CBOE encountered a relatively consistent pattern, illustrated in the following graph:

Historical data thus suggests

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REX launched the MicroSectors brand in 2018. MicroSectors provides concentrated exposure to investable market segments that heavily influence many investor portfolios such as FANG+, Big Banks, Big Oil, Gold Miners, FANG & Innovation, and Oil & Gas Exploration & Production. Important disclosure and additional information can be found here:https://www.MicroSectors.com/

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Comments (6)

it was criminal to design these products and offer them to retail investors as a method to short volatility.
itscalledcommonsense profile picture
Why did you change VMIN after it blew up? Why not change it before? Since you ran an actively managed ETF and had some discretion, why did you subject VMIN shareholders to the roll when XIV counterparts thought the trade was too big and XIV premium was created due to lack of new share creation and arbitrage. It should have been quite obvious to you guys, whose principals have created many of the volatility ETPs in existence that the trade was too big. Do you have any internal emails and/or meeting notes discussing the size of the ETPs relative to the entire VX market and the problems associated with the daily reset?

You can get legal approval before answering, I can wait. It will be much needed practice for them.
itscalledcommonsense profile picture
While you are waiting on legal you could ask them another set of questions:

Since your principals designed XIV and knew it and it's hedging process intimately, why were you not extremely alarmed in 2018 as the XIV premium began to build? Did you take any steps 2/5 @ 1600 CT after seeing that XIV premium to NAV was 14%? You didn't own any shares in XIV at that point in time, did you? If so, why?

These questions will need to be answered at some point, I am sure. Might as well answer them now.
David Lincoln B. profile picture
I don't understand your logic. Why will Rex ETFs have to answer questions about what happened in a Credit Suisse Product? XIV is not their product. Also as far as actively managed, my understanding is that does not mean they can just change their duration horizon if they want to or because it appears you want them to. What if someone was shorting VMIN for example and they went and just decided to change their strategy just cause you wanted them to? I don't understand what point you are trying to make. Sounds like you lost money in XIV but I don't see how that logically translates to somehow VMIN should have changed it's duration, out of nowhere at some point? You seem confused? I definately am.
itscalledcommonsense profile picture
Don't you hold yourself out as an expert in volatility ETPs? This should be trivial, but I will try to illuminate:

1) Due to the massive % losses in VMIN on 2/5 they will most likely be sued by shareholders. Or, at least they would if they had many shareholders. Probably not that juicy a class action target, but we will see.

2) If they do get sued there will be depositions. I think the questions I raise are a decent subset of the tougher questions from the possible initial deposition/information request. These are the questions I would want answered if I had been a shareholder.

3) XIV is very pertinent to the discussion since a) Greg King, founder and CEO of RexShares and other principals created many of the volatility ETPs (including XIV) and should know their impact in the marketplace and, maybe more importantly, b) VMIN was a shareholder of XIV.

4) I didn't lose money on 2/5, I made a bundle being long.

So, yeah, you are confused.
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