Markets

The ProShares Short Volatility ETF Lives To Fight Another Day

The ProShares Short Volatility ETF Lives To Fight Another Day

"This buying pushes the volatility higher still, reducing AUM further, and making the issuer's hedging portfolio notionally more short, inducing further VIX futures buying to resize the portfolio to shrinking AUM", Weisberger said.

The XIV security, which had fallen roughly 85 percent in after-hours trade, had been halted pending this news early Tuesday....

Just one fifth of XIV's outstanding shares are owned by funds and institutions, according to Morningstar Inc.

Monday's selloff triggered the termination of Credit Suisse's VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (ETN), which tracks financial instruments that effectively bet against a fall in markets.

As Benzinga reported Tuesday, XIV was halted Tuesday, and Credit Suisse subsequently issued a press release saying it will be delivering an irrevocable call notice to The Depository Trust Company for the XIV on February 15. Shares of Credit Suisse slumped almost 4 percent on Tuesday morning amid the wider sell-off in equity markets.

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Credit Suisse said late Monday New York time that the XIV's plunge would have no "material impact" on the Swiss bank itself.

The VelocityShares refused to comment on the Monday's move.

Amid Monday's plunge in US stocks, the VIX surged, but volatility exchange traded notes, such as XIV have a unique feature: The indexes these products track settle after the close of USA markets. As the sponsor of the VelocityShares note, Credit Suisse had the right to wind down and liquidate the note if its value changed more than 20 percent in a day. Plenty of other people issued similar warnings.

"If the price of the underlying futures contracts increases by more than 80 percent in a day, it is extremely likely that the Inverse ETNs will depreciate to an Intraday Indicative Value or Closing Indicative Value equal to or less than 20 percent of the prior day's Closing Indicative Value and will be subject to acceleration", according to a prospectus. A federal appeals court in 2014 ruled in favour of the bank, saying no reasonable investor could have read disclosures for the product without understanding their risk.

Shorting volatility, or betting on calm stock market conditions, had been one of the most successful trading strategies until Monday, when a massive selloff in USA stocks derailed some popular short volatility exchange traded products (ETPs).


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