So You Got Killed In TVIX Yesterday? CSFB Might Be Your Salvation

A lot of people lost a lot of money in $TVIX yesterday.

Before continuing, you have to read this post I wrote last night.  I want to be clear about something:  I stand by every word of that post.  If you bought TVIX at an 80% premium to NAV, you were playing a Greater Fool Game, a game of hot potato, pass the live grenade, whatever you want to call it.   You were almost certainly going to lose money in the end – with that certainty approaching 100% as your holding period lengthened.  TVIX was trading much higher than it should have been, and longs were supposed to get carried out if they bought it without understanding what they were getting into.

But then CSFB went and gave you a gift last night: they announced that they were re-instituting creations of TVIX, which will enable the trading price to get back in line with the net asset value.  There are some restrictions on the creations, so the price may not collapse directly to NAV, but the gap will close.

Why is this a gift?  Because it looks awful.  The timing of the decision stinks.   It looks like the news of the share creations leaked.    It looks like there was trading based on material non-public information.  It looks like the big bad wall street firm fleeced their muppet-errific retail clients.

This announcement was made late – after 7pm – almost as if the Powers That Be held a meeting after the close – after the carnage in the TVIX trading yesterday – to try to figure out what to do.  In other words, it seems that one could argue that the move to restart creations was reactionary – to the mega-move in the ETN’s trading price.  On the other hand, I absolutely cannot discount the argument of those who say “come on, you’re telling me that this was a coincidence?  TVIX tanks 30% suddenly on the same day that CSFB announces resumption of creations?”   Indeed – it looks terrible, and it may give those poor ig’nant longs (sorry – but that’s the truth) the possible “out” that they so desired.

Let me be clear – those traders/investors who were buying TVIX at a huge premium to NAV have no one to blame but themselves, as I tried to enunciate in my prior post.  I could give you the Good Will Hunting “It’s Not Your Fault” speech – but it is your fault, and it’s essential that you understand that so you can avoid repeating the same mistakes

– but this “coincident” timing of the major announcement from CSFB may give stuck longs the ammo they need to “sue” their way out of a bad trade. (warning: I AM NOT A LAWYER)

Class action lawsuits don’t seem so crazy anymore, given this news.

I’ll let the MNPI (Material Non-public Information) lawyers argue it out in the comments.*

Again, in case I haven’t made it clear – the problem of asymmetrical dissemination of information (ie, possible insider trading)  is totally distinct from the complaints I was debunking in yesterday’s post: the “TVIX doesn’t do what it is supposed to” claims.  What “should” have happened is that TVIX had a “normal” day yesterday – as normal a day as a product trading at an 80% premium to its NAV can have – and then the news would have come out after the close, and the stock would reprice down 50% this morning.  You’re still going to get crushed, but then it doesn’t look like you got picked off by insider trading.

related:

TVIX: Not Your Daddy’s Blue Chip

GAZ: Ultimate Greater Fool Theory

TVIX: Mess with the bull, you get the horns

-KD

no positions TVIX. Short GAZ.

* in order to short shares of TVIX, any dealer needs to be confident that they will be able to deliver the shares required on settlement date.  But the mere notification that TVIX creations were being reinstated, and thus that borrow would be (confidently) available, seems like it HAS to be the kind of thing that would need to be disclosed widely, right?

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