TVIX – You Mess With The Bull, You Get The Horns

First of all, if you want some background on what’s going on in TVIX please read these two related posts I’ve written on the subject:

1) $GAZThe Ultimate Greater Fool Trade

2) $TVIXNot Your Daddy’s Blue Chip

Now, in the second piece, I speculated that TVIX wouldn’t go batshit crazy in the wake of the share creation halts – because it’s a pretty big ETN, and a big ETN requires a huge amount of “greater fools*” to pump the premium to NAV up big time.  In other words, for $GAZ to get to a 100% premium to NAV, it needs about $45 MM in “fools.”   For TVIX to get to an 80% premium to NAV, it needs about $450 MM in “fools!”  It’s an ever GREATER greater fools trade!   Well, I was wrong  –  as @Xiphos_trading illustrates (by way of $UVXY, a comparable instrument), that’s what happened:  TVIX went bezerker, trading up to a massive premium to its NAV (net asset value).

Here’s a chart, courtesy of ZeroHedge, of TVIX’s premium to NAV:

Lower level shows the NAV premium


Well anyway, as you probably know, TVIX crapped the bed today:


Timber ho


The reason I’m writing this post is because I can’t stand all of the ranting on Stocktwits that I’m reading. Messages to the tune of:

1: TVIX is a fraud

2) Where is the SEC/DOJ?

3) CSFB are scum

4) ETFs don’t do what they are supposed to do

5) someone should go to jail over this

6) class action attorneys must be looking at this and licking their chops

It blows my mind that people were involved in TVIX, paying an 80% premium to NAV for it, and having no clue what is going on.  It’s tragic – it’s inexcusable, and it’s your own damn fault.  As I noted in the previous post, TVIX’s own prospectus has one of the great disclaimers of all time, emphasis theirs:

The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.

Ah, but wait – today wasn’t long term – it was just one day!  Of course, I and many others have written posts explaining the impact of CSFB’s decision to terminate share creations, and I was pointing the incredulous “why is TVIX down 30% today?” inquiries to my month-old post.  Then some dipshit left the following comment on my original post:

“hilarious watching you attempting to clickbait twiter.  need attention much ?”

Which gets back to the reason I’m writing this post in the first place.  As I explained to the anonymous doucheball who accused me of “clickbaiting,” a lot of people lost a lot of money on TVIX today and don’t know why.   The fact that they don’t know why isn’t CSFB’s fault, it’s not the DOJ’s fault or the SEC’s fault.  It’s not TVIX’s fault, HFT’s fault, Ben Bernanke’s fault or Goldman Sachs’s fault.  It’s not Charlie Sheen’s fault, Barack Obama’s fault, or Rick Santorum’s fault (related: it’s not The Gays’ fault either!).    Instead of crying and ranting about investigations, lawsuits, criminal activity, etc, everyone involved needs to realize something:  YOU NEED TO UNDERSTAND THE PRODUCT YOU ARE TRADING**.   That is YOUR responsibility.  You need to understand that no one is coming to your rescue – there’s nothing to rescue you from other than your own unawareness.  See, I took care not to use the word “ignorance” there because I really want people to understand this, and not to put up emotional shields and get defensive.  There’s no one to punish, and no one to sue:  the one who was supposed to know that he was paying a huge premium for TVIX was YOU.  Hey – that rhymes! – let’s put it in it’s own verse as a couplet and repeat it again:

There’s no one to punish, and no one to sue: 

The one who was supposed to know that he was paying a huge premium for TVIX was YOU

The TVIX situation was laid out pretty clearly by a number of people, myself includedAdam WarnerFT AlphavilleBill Luby. @Xiphos_trading.   Index Universe.   All wrote detailed explanations of the impact of the halt in TVIX share creations.   This is the kind of information you need to be seeking out after you do the first thing you should always do when jumping in to a new ETF/ETN:  check and see how it’s trading vs its NAV.   Every single ETF/ETN has a published NAV somewhere on the web from its provider.  When the product is trading at a significant premium to its underlying value, you need to ask WHY.  You should not be trading any product until you know how it’s trading relative to its NAV.  It should be noted that TVIX is the exception, not the rule – this sort of deviation happens rarely.

One Stocktwits member asked me to be sure to write about the timing of TVIX’s decline – suggesting that the selloff happening today is somehow mysterious/scandalous/criminal/I don’t know what.    Look – when you bought TVIX for $15, you were getting about $8.50 worth of NAV.  It doesn’t need a reason to go down – it needs a reason to stay inflated!  The “return to reality” can happen at any time with little to no catalyst.    As @Xiphos_trading noted yesterday: “Look at the premium in $TVIX vs its sister. If it loses half its value suddenly don’t act shocked. “   What do you expect to happen when you’re paying almost twice as much as something is worth?  The game of hot potato can blow up at any time.  GAZ is in the same boat. (quick tangent here: a key point is that both TVIX and GAZ have readily available alternative products that offer very similar exposures without the huge premiums.  $UNG is the alternative to GAZ, and $UVXY is the alternative to $TVIX)

Other questions: Does TVIX’s action today highlight the credit risk inherent in ETNs?  No – I don’t think so:  as I mentioned in the prior post, ETNs are different from ETFs in that they are credit obligations of the issuer.  I don’t think that had anything to do with TVIX’s decline today:  TVIX tanked today because it was way way overvalued – not because of anything having to do with credit risk for CSFB.

@HerbGreenberg mentions that once the creation/redemption mechanism “breaks” (my word, not his), that the ETF/ETN should stop trading.   That’s a noble goal – protecting people from buying overpriced ETPs – but the problem is that there was already over $400 MM of TVIX outstanding.   You can’t just halt trading and screw over all the existing holders.  Liquidating the product could have similarly negative effects.    I agree with Herb that ETF/ETNs become hazardous to investors’ health when the creation/redemption mechanism breaks and variations from NAV creep into the market.

So how do we solve this “problem?”   I started replying to Herb again on Twitter, but figured I’d just put it in here:  One thing that is essential is that issuers provide adequate disclosure that the creation of new shares has been halted, so that potential investors can understand what might be going on.   In this case, I think that there is adequate disclosure: when you go to, the first thing you see is a link to the notification that TVIX creations have been halted, which itself explains the impact, emphasis mine:

“As disclosed in the pricing supplement relating to the ETNs under the heading “Risk Factors—The Market Price of Your ETNs May Be Influenced By Many Unpredictable Factors,” the market value of the ETNs may be influenced by, among other things, the levels of supply and demand for the ETNs. It is possible that the suspension, as described above, may influence the market value of the ETNs. Credit Suisse believes it is possible that the temporary suspension of further issuances may cause an imbalance of supply and demand in the secondary market for the ETNs, which may cause the ETNs to trade at a premium or discount in relation to their indicative value. Therefore, any purchase of the ETNs in the secondary market may be at a purchase price significantly different from their indicative value.”

If anyone reads this post as “gloating” or taking pleasure in the misery of others, you are on drugs.  The very reason I write these posts is because I can’t stand to read the sad statements from the uninformed – I try to inform them of what’s going on.   That said, I won’t tolerate the blame game – it’s your job to understand the products you’re trading, and crying “foul!” “SEC NEEDS TO SUE SOMEONE!” after the fact won’t help you make money.  It’s essential that people understand that what happened in TVIX today wasn’t some grand conspiracy and wasn’t manipulation or insider trading – it was the logical conclusion to the previously illogical price action in TVIX.  It was a return to normal.

disclosure: I have never had a position in $TVIX.  I am short $GAZ.  I have never worked at CSFB.


* please don’t be offended by the term “fool” here.  I’m not trying to insult anyone, but you really have to understand the concept of a Greater Fool Trade to understand what’s going on here.  It takes all the rocket science and conspiracy theories out of it.  You could also call it “hot potato” or “pass the live grenade and hope it doesn’t blow up in your hand”

** I wouldn’t have any problem at all with broker certifications that required traders/investors to demonstrate a certain amount of knowledge/competence before trading products like this.  All ETF/ETNs based on futures which are in contango should require one certification – stating that the trader understands the situation.   All products where creations are halted should require another certification – demonstrating that the trader understands the impact of the creation halt. I mean, that is, if you want to protect people from themselves…

Thanks to @RichAllenSF for the inspiration of this post title.

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