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The TVIX Debacle
With the double-levered long Vol ETF TVIX down 30% in the face of a falling equity market and rising VIX, reality appears to have been suspended. The crushing divide seems driven by the fact that Credit Suisse halted share creation forcing the ETF to behave more like a closed-end fund and with its massive premium to NAV (thanks to extreme hard-to-borrow-ness), this compression makes some 'technical' sense. While the Vol ETFs are designed to track VIX futures not spot, we remain skeptical of these instruments (or the options on them in their wonderfully compound manner) and although CS has said this cessation of share creation is temporary, it definitely brings up significant operational risks for anyone considering trading these vol plays.
The TVIX premium to NAV was huge at over 80% as it became hard-to-borrow and with today's action that premium is cut in half (and we assume NAV will rise given the pop in risk).
UPDATE: What is probably most likely the driver of the collapse, however, is the reversion to reality (akin to the NAV premium) as pointed out by Nic Colas (h/t) of TVIX (the actual equity position) to TVIXIV (the underlyting vol index itself)...
Charts: Bloomberg
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From Tyler's earlier post quoting the prospectus "The ETNs, and in particular the 2x Long ETNs, are intended to be trading tools for sophisticated investors to manage daily trading risks. They are designed to achieve their stated investment objectives on a daily basis, but their performance over longer periods of time can differ significantly from their stated daily objectives."
The double/triple inverse reverse ETF/ETNs are intended only for retards, their intended purpose is to dive into the ground faster as volatility increases (unless you are the market maker, then you just wait and make $$), and since you are buying these and you don't' see the muppet^h^h^h^h^h^h client, then you are the muppet^h^h^h^h^h^h client.
If and when the premium on your favorite physical metals derivative collapses, I'll be curious to see if the response is the same. This is not about leveraged/inverse products, which ARE stupid, it's about you paying way more than instrinsic value (perhaps without realizing it) and the market in the product undergoing an outside shock. (I rarely post and if someone interprets this post as a PM troll, you're dead wrong again. Sometimes I really worry about the ZH lens even though I mostly share it.)
Stock market bottom April 2012
http://stockmarketbottom.com