I am an idiot.
Here’s the story.
I have a fascination with volatility. I don’t trade futures or options but have dabbled in a product called $XIV which is a hopped up futures ETN (not an ETF – so it is basically an I owe you with no underlying assets) that crashes when market volatility explodes.
This afternoon market volatility exploded and that meant $XIV was in crash mode.
Here is what the Volatility Index (VIX) looked like as the markets closed:
In fact, today was one of the biggest moves if not the biggest percentage wise in the history of the VIX.
So, near the close I added some $XIV in the 90’s. Worse, I shared what I was doing and added more after the close in the 60’s. I always share what I am doing to keep me honest. In this case sharing was a bad idea as I am sure some people followed me. I do not ever recommend these types of ideas, but wanted to be transparent during this crash. Here is the chart of the $XIV price action today during and after the close:
Long story short, it seems like after hours, the product is getting liquidated (the share price was $140 last week and assuming it has been liquidated – $3 billon becomes $150 million in one day for just this one product). Credit Suisse has the right, according to the prospectus, to liquidate the ETN in the event of an 80 percent move in the ETN, which after hours seems to be the case.
I could list 100 things wrong with the the idea, the product and the participants that float this ETN to the public, but it won’t change much. In fact – here is a statement from Credit Suisse which shows how cruel and heartless banks and the markets can be…
The real lesson is to use actual futures and options directly when you want trade volatility and not some lame product put together by marketing departments of banks and fund providers.
This is truly a Black Swan event and there are will likely be much bigger market repercussions over the months ahead. The stock market is now only down eight or so percent from it’s all-time highs, but billions of retail investing dollars will be wiped out overnight in these ETN products. While we are still in a major market uptrend, Wall Street has managed to create an ETN that implodes on a rather normal market occurrence.
PS – As bad an idea as buying $XIV was, if I had bought the sister ETN $TVIX to express the same trade I would be up 100 percent on the idea tonight.
PSS – On the bright side…it only took two bad market days for CNBC to run their go to panic special ‘Markets in Turmoil’ which they promoted all afternoon on Twitter. That’s bullish for the markets, but after my lesson today, not something worth betting on with an ETF or derivative.
PSSS – How bad was the market action today…2008 financial crisis bad.
PSSSS – Why you should have a buy list ready – you want to add to your favorite stocks into a panic like this.
PSSSSS – Another reason I will be shopping to add equity exposure tomorrow at least for a trade
PSSSSSS – This chart from Josh Brown is fun but also partly true about how politics may finally be tipping people to worry. Worry becomes panic so quickly in the markets.
That is my PSSSSSSSSSSSSSSSing record.
Also published on Medium.