XIV/SVXY - Was it criminal or legal arbitrage?

XIV/SVXY - Was it criminal or legal arbitrage?

Keep plenty of cash and don’t overextend

Most people who had their accounts blown in the past few days did not pay attention to the 3 important issues:

• When we are in backwardation (i.e. a downwards VIX futures graph where M1 > M2), there is a tailwind for UVXY, TVIX, VXX and headwind for XIV and SVXY

• February 2, 2018 onwards we started seeing backwardation. I started reminding through these newsletters that one needs to act and I am taking action. Close your position or add hedges.

• A full chapter – 16 – has been devoted in our book on what options one has when the VIX futures graph has a downward slope

The Volatility based ETPs still appear to be broken

I am taking daily screen shots of prices and here is one result during the day today. All of the below are for that specific instant:

VXX down minus 0.65% 
UVXY up 10.38% 
TVIX up 10.39% 
SVXY up 4.82% 
XIV down 9.66%

Normally, if SVXY and XIV are up x%, VXX is down x% and TVIX & UVXY is down 2x%.

But well, we are in crazy town and there is no supervision of these funds and there is no transparency.

You can open your phone and see the closing prices of these volatility based ETPs. At close today, VXX is up 4.01%, UVXY is up 22.14%, TVIX is up 21.18%, SVXY is up 0.78% and XIV is down 14.69%. 
This happens only in crazy town.

How come XIV gets closed but SVXY survives?

It is unfortunate that XIV will be closed. But SVXY managed to survive (of course with a 90% haircut in its price).

The XIV fund could have taken steps by rebalancing at 4 PM EST on Feb 5, and not 4:15 PM EST. They rebalanced at 4:15 and then decided to close the fund.

SVXY also rebalanced at 4:15 PM EST on Feb 5. Their NAV was $3.91. Next day, they opened trading around mid day at $ 11 plus. 
Defies explanation!!

Closing Price and NAV price

Finally, I am not sure if I have been successful in explaining how the pricing of these tickers works. This is covered in enough detail in our book. Still let me explain.

These volatility based ETFs are priced off of M1, and M2. At all times.

So in premarket, their price will depend on M1, M2 at that point of time. 
When market opens, same thing. 
During the day, same thing.

At 4 PM, when the market closes, the closing price that you see on your phone is a price which takes into account M1 and M2 values at that point of time.

At 4:15 PM, the M1, M2 at that point of time, is used to calculate the NAV. This NAV can be very high or very low based on the difference between M1, M2 at 4:15 PM and 4:00 PM

The 4:15 PM EST M1, M2

I have observed that these M1, M2 prices at 4:15 PM EST vary drastically (either up or down) on many days, thereby influencing the NAV of the tickers like XIV SVXY VXX UVXY and VXX.

The demise of XIV (and the 90% haircut of SVXY price) was solely because of the huge difference in M1, M2 between 4 PM and 4:15 PM EST on Monday February 5, 2018

Its all about M1 and M2

The only thing I learnt rather well after writing our book was the pricing of these volatility ETPs is only dependent on M1 and M2. Of course spot VIX can drive M1, M2 up or down. But if one can control or manipulate M1/M2 during any part of the day or specifically at 4:15 PM EST, a lot of damage can be done or a lot of damage can be contained!!

Is it criminal or is it legal arbitrage?

Since last 2 weeks, M1, M2 was controlled. No doubt about it. Initially some money could have been lost. But that influenced the price of these volatility tickers, where a lot of money “could” have been made by the same people.

Was it criminal? Was it legal arbitrage?

This can be decided only when some one (SEC?) investigates the pricing and NAV of these Volatility based ETPs. Especially, the Monday February 5th M1,M2 transactions - who bought it? Who sold it?

Till that happens, the crazy action will continue. VXX will be up. UVXY will be down as we have been seeing all day yesterday and today.

And account will continue to be blown up.

Stay safe and if you want, make some phone calls, write some letters to the ETPs or regulators (SEC), to bring about some transparency. 

Even if one life is changed by our educational attempts, we would consider our efforts in writing the book a success.

The material in this newsletter, the website as well as in the book "Trading Volatility - Using the 50-30-20 Strategy" is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. As an investor, you are fully responsible for any investment decision that you make.