Credit Suisse TVIX Crashes to Record Low Price
Credit Suisse TVIX Crashes to Record Low Price
Full disclosure: I lifted that byline from Bloomberg.
Product knowledge is one of the first rules about trading derivatives. As a trader I spent a lot of time trading names that I grew to be very familiar with. A big day was when a new product was listed and the guys in the pit would look at each other. The product had no trading history but we were obliged to make a market in the options anyway. That was always interesting since there was not much of road map to go buy. I use the same ideas now that I used then except I have the opportunity to sit on the sidelines first.
1. I watch and see how other similar products trade to see if there are any ideas out there.
2. I look at the impact of outside market forces on the new product.
3. I wait as long as I can before commiting capital. Then wait one more day.
I first came into contact with the TVIX through Option Pit. The product was issued by Credit Suisse and Velocity Shares, two firms which have some considerable experience creating ETPís (Exchange Traded Products). The idea of the TVIX is to create 2x Daily performance of the short term VIX futures. There has been some reported news that CSFB stopped issuing creation units so the TVIX market value started blowing up over the NAV of the fund. That created some problem in having the TVIX track what it was supposed to.
Look at my quote screen below:
On a day when the VXX (a reasonable but not perfect 1X proxy for the TVIX) was up .11 the TVIX WAS DOWN $4.45! Now I call that tracking error. When viewed side by side in context the fall of the TVIX does not look so unreasonable just really late. Below the TVIX was defying gravity for several sessions as the name kept building over NAV. While there could be several reasons for the TVIX collapse it is finally mirroring the decline in the VIX futures over the last 10 days or so. It should roughly be going down twice as fast as the VXX and it has now caught up. However, I still read a $7.62 value in my TOS platform which, suggests there is a couple of bucks to go just to get to current levels of the other volatility products. This is one name I am glad I donít have to make a market in.
Charts from Google Finance
The trade
Avoid the TVIX for now. It is a broken mess until the NAV gets right. If fair value is in the mid $7 handle then there is little reason to dive in now. I do think these products have caused above average intraday volatility (note the crush in the VXX at the EOD today in the chart above) which makes selective day trading more interesting. Day trading the VXX from the short side (put spreads) makes sense on the intraday pops, while these fund manager busily fill up and empty their buckets. The steep contango on the VIX futures keep the decay flowing for the VXX so might as well hop on.
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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He is co-host of "Option Block," the wildly popular show on The Options Insider Radio Network.
He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com
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