This article on the VIX ETFs is an easy read and it clearly reinforces why I think TVIX is going to skyrocket at some point soon. Jarad mentions some of the fundamentals behind the TVIX chart patterns I have been writing about for months now. The timing of this article couldn't be better IMO, especially the part about being short the VIX has become ridiculously popular as if it is a risk free thing to do! He provides a chart and comments on it as follows:
This
chart is...equity derivatives... the point is that people have been
fleeing long volatility ETFs and piling into short volatility ETFs, to the point where the public is no longer net long volatility, for the first time in history... This has huge implications. Many
people think that the V-bottom that we got last week was about
dip-buyers or performance-chasers. That is true, but the bigger story is
that retail investors (and professionals, too) came in and crushed volatility in a major way by plowing money into short volatility ETFs.
...The
statement implicit in selling volatility is “I think things are getting
back to normal.” But things have been normal for a long time. We’ve gone
1,000-plus days without a 10% correction, and we will likely go even
longer, because that last correction wasn’t even 10%. I could probably
think of five things off the top of my head that could get the VIX back
to 40 or 50.... What
I’m describing here is a sea change in investor attitudes that has
profound implications for the rest of the market.
Those who are shorting volatility are going to get absolutely crushed when the short squeeze arrives. It's going to move so fast that they will cover at any price and it should create a dramatic gap up. Again, I cannot say when except that the models continue to indicate "pretty darned soon".
If the break out in the miners turns out to be real then I think stock breakdown cannot be far off.
Can UVXY/VXX/TVIX really experience a short squeeze? I think not as the issuer would just issue more shares at current intrinsic value when the demand from 'short covering' increases. The security tracks the Short Term Futures Index regardless of buy/sell pressure from trading.
ReplyDeleteThoughts?
No, the issuer cannot simply increase the share count at will! They have to have some form of accounting whereby there are underlying assets (paper promises, really) which map to the share count. The shares represent paper promises (a form of insurance, really) and such promises cost money to be made. In other words, insurance cannot be conjured from thin air. You must pay someone a premium and you must do this and payment must come from known cash reserves.
ReplyDeleteYou cannot simply start an ETF with zero assets and once started you cannot simply change the rules as you go along unless you control the entire trading system and are a blatant counterfeiter like the US federal reserve is.
As for tracking the short term futures index, this does not occur by magic! It does not occur regardless of how the issuer tries to game the system. In fact it only works as long as the issuer does not game the system. As soon as he perturbs things by issuing new shares against nonexistent assets, the expected tracking is lost, the market takes notice (VERY QUICKLY!!) and the SEC comes-a-calling.
By the way, here is some other logic for you. You and I are just dudes in the world. Neither of us have any Wall St. experience. If our gut feel for how something should work conflicts with how some experienced guy like Jared Dillian says it works, our first reaction should not be to proclaim him wrong but rather to look inward for our error. I'm not saying they are always right but I always take up their logic position and then use real data to either validate or refute it instead of just assuming them wrong because I have some loose, untested understanding of a thing.