ZT: XIV and SVXY Going to $0: What Would it Take? (谈股论金)  613次阅读

作者: Dolphin , 发表于: 2018-02-06 (2486天前) @ 新东

In a recent post, we discussed an inverse volatility product called XIV. In the post, we mentioned how a significant one-day increase in the near-term VIX futures would lead to substantial drawdowns in XIV and SVXY (a very similar inverse volatility product). A common question potential XIV or SVXY investors have is, "why wouldn't I just buy XIV or SVXY on a dip and hold it forever, knowing that it will eventually rise when volatility inevitably comes back down?"

The biggest problem with this approach is that you may not be able to hold forever, as XIV​ and SVXY could "go out of business" if volatility rises substantially in a single trading day.

In an event where the near-term VIX futures increased by 100% in a single trading day, XIV and SVXY would go to $0. However, we haven't seen a volatility increase that large since XIV and SVXY have been around. Additionally, VIX futures are less sensitive to changes in the VIX Index, so their daily percentage changes will be smaller.

So, how much would the VIX Index have to rise for XIV and SVXY to go to $0?

XIV and SVXY's Beta to the VIX Index
To answer this question, we first need to know how much XIV and SVXY tend to move in relation to changes in the VIX Index. Beta is a metric used to compare the volatility of one underlying against a benchmark, typically the overall market. For example, if a stock has a beta of 0.66 to the market, the stock is expected to shift by 0.66% if the market moves 1%.

We went back and calculated the beta of XIV and SVXY to the VIX Index (using close-to-close returns since each product's respective inception date):

Product

Beta to VIX Index

XIV

-0.46

SVXY

-0.47

XIV and SVXY's betas of approximately -0.46 mean that if the VIX Index increases by 100% in a single trading session, XIV and SVXY are expected to fall by 46%. Based on these figures, it's estimated that the VIX Index would need to experience a one-day increase of 217.4% (217.4% x -0.46 = -100%) in order for XIV and SVXY to fall to $0.

However, it's important to note that XIV and SVXY do not have to fall to $0 for investors to get "stopped out" of the products. In the case of XIV, Credit Suisse (XIV's issuer) states that if XIV falls 80% or more in one trading day, they reserve the right to close down XIV, in which case you'd receive the closing Indicative Value of XIV on the date of the final valuation:

​"As discussed in more detail under “Specific Terms of the ETNs — Acceleration at Our Option or Upon an Acceleration Event” in this pricing supplement, an Acceleration Event includes any event that adversely affects our ability to hedge or our rights in connection with the ETNs, including, but not limited to, if the Intraday Indicative Value is equal to or less than 20% of the prior day’s Closing Indicative Value." - Credit Suisse

Based on a beta of -0.46, it's estimated that the VIX Index would have to increase by 173.9% in a single trading day for XIV and SVXY to fall 80% (173.9% x -0.46 = -80%).

The Largest Single-Day VIX Increases Since 1990
Since we've discussed the projected one-day VIX increases that would lead to XIV and SVXY decreases between 80-100%, we now have another question to answer: "what are the largest single-day VIX increases?"

Since 1990, here are the 10 largest single-day VIX Index increases (close to close and as of this writing):

10 Largest VIX Increases
As we can see, the VIX has not logged a single-day increase of more than 64% since 1990. So, there hasn't been a day in which XIV and SVXY faced a forced-redemption event. In the previous section, we determined that the VIX would need to increase 173.9% in a single trading day for XIV/SVXY to fall 80%. With the largest single-day VIX increase since 1990 being 64%, we'd need a volatility increase 2.7x larger than the current 27-year record.

Of course, over a long enough time horizon, this type of move can surely happen.

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XIV's 10 Largest Single-Day Decreases
Since we've looked at the largest single-day VIX increases, let's take a look at XIV's largest single-day decreases since XIV's inception in late 2010:

10 Largest XIV Decreasees
Based on these figures, it becomes clear that XIV's strong historical performance comes with a lot of risk. Most investors would prefer to not experience a daily drawdown of 27%, let alone 2%.

Additionally, we must keep in mind that XIV has only been around since late 2010, which means XIV's performance since inception has mostly been in a low volatility market.

Hopefully, this post has shed some light on the risks associated with buying XIV or SVXY, as well as the probability of them "going out of business."

Summary of Main Concepts
To quickly summarize what this post has covered, here are the key points to remember:

Inverse-volatility products such as XIV and SVXY tend to rise over time because the VIX term structure is often in contango, which results in a positive drift in XIV and SVXY as the near-term VIX futures fall towards the VIX Index.

While the idea of buying XIV and SVXY on a dip and "holding forever" seems logical, the products could potentially go to $0, or get closed down by the issuer if volatility rises significantly in a single day. In XIV's case, Credit Suisse reserves the right to force a redemption of XIV's "shares" if XIV falls more than 80% in one trading day.

Based on a beta of -0.46 to the VIX Index, the VIX would have to increase 217.4% in a single trading day for XIV and SVXY to fall to $0. For XIV to fall 80%, the VIX would have to increase by 173.9% in a single trading day. These figures are hypothetical and based on the historical betas of XIV and SVXY.

Since 1990, the largest one-day VIX increase from close-to-close was 64%, which is only one-third of the estimated increase needed to put XIV and SVXY "out of business."

Keep in mind that XIV and SVXY have only been through low-volatility market periods, as they've only been around since late 2010 (XIV) and late 2011 (SVXY). In sustained periods of high volatility, XIV and SVXY's performance will differ significantly from the performance we've seen since each product's inception.