ZT: Is XIV the most dangerous investment in the world? (谈股论金)  305次阅读

作者: Dolphin , 发表于: 2018-02-06 (2489天前) @ 新东

Hey Frank, I was reading an article and it said XIV was the most dangerous investment in the world and that we shouldn’t buy it since volatility has been so low for so long. I’ve looked at the graph and this ETF is up nearly 600% in the past five years. With the economy doing well, it seems like it might continue to do well however. What are your thoughts on it? Thanks.

Note: this article also applies to SVXY, which does the same thing as XIV.

XIV, which is just VIX read backward, is not an ETF (Exchange-traded fund), but rather an ETN (exchange-traded note). While the difference is not really relevant for the purpose of this article, you should know the difference at least.

Similarily, you should know the VIX is the implied volatility, calculated from options prices on the S&P500 expiring at different time interval. VIXJAN, for instance, is based on the prices of options expiring 30 days after a certain, fixed date in January of that year. Basically, the higher the VIX, the more people expect the stock market to move (and the more drastically). We can describe the VIX as a “volatility predictor” or “fear predictor” because it indicates how much people are ready to pay for future protection/hedging on the stock market. My own personal opinion is that the VIX is a very poor product, but that’s a topic for another day. Overall, it does what it was designed to do: track how much people are ready to pay for options on the S&P500.

With that in mind, my own personal opinion is that I would never invest in it. In my opinion, XIV is not a long-term hold. It can be traded for sure, but over the long term, the risk outweighs the reward. We’ll discuss why later.

First, let’s look at the five years return of XIV:

Indeed, XIV is up nearly 6 fold over the last five years, easily crushing the S&P500 and pretty much every other asset class there is. But, there is a catch.

Basically, whenever you see something like that, you should know there’s a catch.

The problem with XIV is that one day, it will go to $0 with a 100% probability. I’ll spare you the full mathematical proof, but it can basically be summed by this comment on VIXCentral.com:

Although not 100% accurate, the comments above sum up the situation: if VIX went up too much, VelocityShares, the managers of XIV, would immediately liquidate the fund and keep whatever scrap is left. Thus, with XIV, you are risking 100% of your money at all times. Any time, the VIX could spike and XIV could go to 0.

One may mention the same thing is true for stocks, that they can also go to $0 at any time, but that’s not an entirely accurate depiction of reality. Stocks offer a very different risk profile. For instance, if the VIX jumped 100%, stocks could globally only go down 10% or perhaps even lower.

Even if we compare XIV to a single stock (some single stocks have crashed to $0 or near $0 overnight), the risk is very different because a stock usually has a product or offers a service, obtains cash flow, files report, etc. In other words, a stock is based on something tangible. XIV purely depends on VIX futures contract, which is something calculated used mathematical formulas. In other words, it is based purely on virtual products and the promise of being paid something. Likewise, VIX is at the mercy of the market. Do not think, not even for a moment, that VIX are not or cannot be manipulated. Since it is calculated using options prices, it can be pushed in either directions just due to speculators.

Even if companies do go bankrupt from time to time, no companies, or at least very few companies, are designed to fall by design. XIV, however, is designed to go to $0. It was basically set up to fail. Thus, while you earn great returns, you are literally holding a ticking bomb. Make no mistake: one day, it will explode.

In 2011, there was a “baby crisis,” and the XIV plummeted from 19 to 6:

And this was not by any means a major crisis. Also note the big crash in 2015, where XIV went from $47 to $22 pretty much overnight. Again, that was a rather minor event.

In the chat I’ve linked above, a commenter mentions that if the VIX jumped to 30, XIV would go to 0. This is incorrect. In order for XIV to go to 0, VIX would have to jump a bit higher than that, pêrhaps to 40 or 50 overnight. Then, XIV would open with a negative value and it is likely VelocityShares would close the fund to avoid further losses. You’d get a total loss. Note that VelocityShares is assuming that risk by managing this product. This risk is contained within their 1.35% annual fee. It is also possible that they buy reinsurance since the probability of XIV having a negative value are extremely slim.

The VIX is unlikely to jump that high overnight, however. The biggest one-day jump was 64% during the financial crisis. If such a thing happened today, XIV would open down 64% or so the next day. Then, if volatility kept going up, XIV’s value would keep declining.

In other words, imagine it crashes 64% on day one, 11% on day 2, another 25% on day 3, 17% on day 4, etc. Eventually, XIV would have a value so small it wouldn’t be worth continuing anymore. VelocityShares would close the fund and you’d be lucky to get 2% of your money back. This scenario is far more likely than the scenario above.

In other words, even a relatively minor crisis will wipe you out. All this time, stocks could move 20% or less.

A couple of caveat before I finish:

XIV depends on VIX futures, not the VIX itself. Futures are basically a guess at how much the VIX will trade at at some point in the future. If the VIX is 10 today but the market thinks it will be 15 in march, then the VIXMARCH futures will be at 15 or close to it. Of course, VIX futures are linked since they track the same product and relate to the same stochastic process. See the volatility curve for more information.
This means XIV is not as volatilite as the VIX. In 2011 for instance, VIX spiked to 40, a 100% rise in very few days. XIV still only crashed 66% due to the fact it depended on futures.
Eventually, a crisis will wipe XIV out, or at least crash it 95% (see scenarios above).
Buying XIV after a volatility spike is not a perfect solution neither; this is something I’ve discussed on stream, but the TLDR version of it is that you never know how high the VIX can go. There is no “upper limit” at which it will magically stop climbing. It could go from 10 to 20, then to 40, then to 60 and then to 80, etc. If you buy XIV at 5 after the crash, there is no reason it cannot go to 0.50 or lower.
Thus, XIV is a high-risk, moderate reward trade.
For this reason, I’d never hold XIV long-term. Personally, and this might sound stupid, I’d never hold XIV even overnight. The risk outweighs the rewards. It’s easy to look at a 5-year graph and realize it went up so much, but this is a bit of a selection fallacy: you are looking at perhaps the five best years for holding XIV in a very long time. And it only takes truly one bad day to wipe out.

There are ways to play volatility that, in my opinion, are far better. For instance, you could short further-expiration VIX and hold near-term VIX for a much less risky, and probably nearly as profitable (but more complicated), trade.

Overall, XIV is not the riskiest trade ever (DRYS? Pinksheets? Small cap pharmas?) but it’s not a good play neither.

Update 7/11: As soon as I posted this article, someone asked if shorting XIV made more sense since “one day, it will crash.” The answer is no. While XIV will crash to $0, the crash might happen 10 years from now. Until then, you will be stuck holding a short position that is going up and up, losing you more and more money, until you (perhaps) hit a margin call. This is just not the kind of short you want to hold long-term. Plus, you’d need to pay borrowing fees meaning that even if it did crash, there is no telling whether or not you’d make money. That being said, shorting XIV short-term does make sense.

One last thing: just because volatility has been low for so long doesn’t necessarily means it’s about to go up. Yes, one day, it will, but as I just said, that day might be very far away. Obviously, in order to spike, VIX has to be low in the first place.