RIP: XIV. Credit Suisse declares 'acceleration event'. Will close ETN

ETrade Bans Margin Trading on Volatility ETF as Swings Increase

The blow-up was the culmination of a long-running and wildly popular short volatility trade that was one of 2017's most profitable. Investors are anxious about how the failure of some products created to short the VIX index will affect Cboe Global Market's VIX-related volume, revenue, and ultimately, its earnings.

"If the price of the underlying futures contracts increases by more than 80 percent in a day, it is extremely likely that the Inverse ETNs will depreciate to an Intraday Indicative Value or Closing Indicative Value equal to or less than 20 percent of the prior day's Closing Indicative Value and will be subject to acceleration", according to a prospectus. In the five years leading up to market close yesterday, the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV) generated a compounded annual return of 35.7%, easily outpacing the stock market average.

But as the VIX index soared this week, more than doubling from Monday's closing price to Tuesday's open, inverse VIX funds crashed.

On Tuesday, Credit Suisse AG, the issuer of XIV, exercised its discretion and announced the redemption of the note.

The VelocityShares Daily Inverse VIX Short-Term ETN sank 86 percent in after-hours trading, while the ProShares Short VIX Short-Term Futures ETF fell almost 80 percent as investors questioned if they could survive the volatility shock. However, ForexLive went ahead and calculated that Credit Suisse may have incurred a more than $500 million loss.

As of Monday night, the fate of SVXY was still up in the air. So let's assume the next day the VIX rises back up to 10.

More news: Dozens trapped in hotel as 6.4 magnitude natural disaster strikes off Taiwan's coast

But these funds, though small, did help amplify the sell-off and the surge in volatility, in a sign that abnormal positioning in derivatives markets can have knock-on effects on the wider market.

While holding cash can keep a portfolio from plummeting - cash doesn't move in any direction, of course - that's not why investors should use it as a volatility-mitigating tool. That suggests retail investors could own a sizeable chunk of the volatility product which booked a 585 per cent gain for the two years ending February 1.

And he wasn't alone. As the VIX moves over 20, there is more risk entering the market. He warned that a "sudden eruption" of volatility could leave traders "badly burned". That allowed traders to sell one-month futures contracts and make money as those contracts matured.

Now that all of these short-volatility naysayers have been proven right, the question becomes: what now?

The robust hedging activity was in line with a spike in equity market volatility rising to a level not seen in months, said Jim Strugger, derivatives strategist at MKM Partners in NY.

As it happens, however, the death of XIV wasn't just the predictably result of a collapse in the equities market, but a kind of suicide. The pick-up in stock market gyrations early last week drove more people to bet on subdued stock market gyrations, said Anand Omprakash, director of equity and derivative strategy at BNP Paribas in NY.

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