VelocityShares Daily Long VIX Short Term ETN (NASDAQ:VIIX)

CAPS Rating: 1 out of 5

Recs

3
Player Avatar bbmaven (100.00) Submitted: 1/22/2013 11:30:57 AM : Underperform Start Price: $131.40 VIIX Score: +9.49

The volatility ETF's or ETN's (TVIX, TVIZ, VXX, UVXY, CVOL, VIIX and some others) are based on VIX futures - some short term, some longer term. When volatility is high, they will spike. However, that averages around 10% of the time over the course of a year. When volatility is low, it costs the funds a great deal to continue to roll both the short term and longer term futures. When the longer term futures reflect mor volatility than the shorter term futures (which is true about 90% of the time, resulting phenomenon is called contango - VIIX will go down even if the vix stays static. The reverse is called backwardation - but is usually short lived.

In essence, each of these as long term investments are horrible - they WILL go to zero eventually. In fact, they are designed to do so. They are the safest short on the planet except for one thing - when the spikes occur, it is tough to maintain the shorts as the shares become extremely difficult to borrow. If one is over allocated, the margin requirements become severe. And there is a good chance that one's short can get closed out at the worst possible time.

This is not a problem in the CAPS game. Each of these will go down in the long term - GUARANTEED. When ETF's and ETN's get down into single digits, they often do a reverse split to continue trading. My guess is that VIIX will do a reverse split when it gets down to about $7.

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Member Avatar LocalLegend (98.63) Submitted: 1/28/2013 4:32:45 PM
Recs: 0

Do you actually trade the volatility ETN's on a regular basis? Or just in CAPS?

Member Avatar bbmaven (100.00) Submitted: 1/28/2013 7:28:41 PM
Recs: 1

Yes - but in very low allocations. They are extremely dangerour - even though they are going to go down over the long term, there can be huge spikes that can result in 1) your broker forcing you to close your short, 2) margin calls if you are overallocated, 3) synthetic short options can be exercised against you. In effect, what happens is that you are forced to close out the short at the worst possible time and it may not be possible to reopen it until the price goes down significantly - locking in a loss.

So, I play VXX and TVIX and UVXY - mostly with synthetic shorts because the shares are hard to borrow - but never more than 3-4 call/put combinations at a time. I think it is alot easier to short directly if you have an account at IB - but I don't.

bbmaven

Member Avatar gopublic (91.00) Submitted: 2/8/2013 8:45:59 PM
Recs: 0

Please tell me how to differentiate Risk on ETF and ETN. Thank`s. Charlie.

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