Markets

Investors lose big on products that bet against volatility

Investors lose big on products that bet against volatility

Yet the popularity of these vehicles might have contributed to one of the most violent moves in USA equities in history: one that saw the Dow Jones Industrial Average slump more than 6 percent in a span of six minutes. That means if you were short the VIX, expecting little or no volatility, the trade went very much against you.

"There may have been some pretty sizeable program trades that were clicked in". The payment will occur three business days later, on February 21.

The XIV effectively bets against the widely-followed VIX volatility index, which gauges market fluctuation.

At the time of writing, S&P 500 Dynamic VIX ETN Ipath (XVZ) has a 14-day Commodity Channel Index (CCI) of -180.02. The index has data going back to 1990.

The VIX's long-term average stands at 19.34. That said, a decline in VIX-related volumes could be a short-term headwind for the exchange operator, as it has benefited indirectly from large bets against market volatility. The ATR is not used to figure out price direction, just to measure volatility.

Maryland-based ProShares said in a brief statementTuesday that SVXY's after-hours action on Monday, which saw the product tumble, was consistent with its objective and reflected the changes in the level of its underlying index.

VIX-linked ETPs' net short exposure hit a record high on Thursday, Omprakash estimates.

If you're afraid of losing money but you're heavily weighted to stocks, then no matter what happens, you'll panic anytime the market falls. Many investors hopped on for the ride, viewing this ETN and others like it as a way to make a highly leveraged bet that stock prices would go up and up, and with little volatility along the way.

But these funds, though small, did help amplify the sell-off and the surge in volatility, in a sign that abnormal positioning in derivatives markets can have knock-on effects on the wider market.

Intercontinental Exchange Inc. (NYSE: ICE), which owns the New York Stock Exchange (NYSE) and many other exchanges, was last seen down just 1.3% at $70.50 right before noon Eastern Time on Tuesday.

"For the first time in quite a long while I think it is extremely enticing", Metz said.

The record spike in the Vix, a market measure of volatility, on Monday led to the closing yesterday of two investment vehicles created to profit from relatively benign conditions amid concerns about investor losses.

It's less than a week since the blow-up in XIV, the short-volatility ETN issued by Credit Suisse Group AG, hurting professional and retail investors alike. One of them - the VelocityShares Daily Inverse VIX Short-Term ETN, known as XIV - will soon be extinct. (The VIX tends to move in the opposite direction of US stocks.) Such products typically buy VIX futures as the index rises and sell them as it falls as they seek to maintain a constant degree of exposure to the underlying index.

SVXY sponsor ProShare Capital Management LLC declined to comment.

Nomura Securities said earlier it would redeem its Tokyo Stock Exchange-listed "Next Notes" S&P 500 VIX Short-Term Futures Inverse ETN after a massive loss in the product.

The problems these tracker funds are facing should not cause permanent damage to the broader market, investors said, as the total assets under management pales in comparison to the broader options market and equity market overall.

It was not immediately clear if the issuers would opt to liquidate these products.