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XIV Is Dead: Credit Suisse Pulling the Plug on Inverse Volatility Product

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Selling volatility has been a sure money maker since Donald Trump was elected president some 14 months ago. But that all came undone last week when a jaw-dropping rise in the CBOE VIX obliterated one inverse volatility product.

End of the Road for XIV

Trading of the VelocityShares Daily Inverse VIX Short-term exchange-traded note (XIV) will officially cease on Feb. 20, according to Credit Suisse, the product’s issuing bank. XIV, which is designed to give the opposite return of the CBOE VIX Volatility Index, nosedived Feb. 5, triggering an “acceleration event” for the fund.

“On the acceleration date, investors will receive a cash payment per ETN in an amount equal to the closing indicative value of XIV on the accelerated valuation date,” Credit Suisse said in a statement. “The last day of trading for XIV is expected to be February 20, 2018.”

The XIV collapsed because of an unprecedented rise in the VIX. The so-called “fear index” spiked 115% on Feb. 5 for its largest ever single-day advance. Because XIV is designed to perform inversely with the CBOE VIX, it trades in the same direction as the S&P 500 Index – only at three-to-five times the speed.

U.S. stocks just rounded out one of their worst weeks since the financial crisis, with the S&P 500 Index plunging more than 5%. Losses of this magnitude were enough to spike the VIX and tank products that offer inverse exposure.

Prior to last week, the XIV had dramatically outperformed the broader market, with returns of 1,200% since inception in 2010. By comparison, the S&P 500 had doubled over the same period.

To get a sense of just how dramatic the fall in XIV was, consider that the fund had nearly $1.9 billion in assets on Jan. 31. Just six days later, total assets had dwindled to just $110 million.

The XIV had at least two other close calls over the years, the first being in 2011 when the United States had its credit rating downgraded by Standard & Poor’s. As the stock market plunged, XIV fell 71% over a three-week period. A similar loss happened in 2015 after China’s devaluation of the yuan triggered a global panic sale in equities. In both instances, the XIV managed to recover.

A Warning for Other Inverse Products

The equity market’s massive slide put other volatility-related funds on the rope, including the ProShares Short VIX Short-Term Futures (SVXY). The fund is trading at a mere fraction of where it was more than a week ago, although ProShares has assured investors the product was doing what it was meant to do.

The fund manager told clients following the Feb. 5 crash that “the performance on Monday  [Feb. 5] of the ProShares Short VIX Short-Term Futures ETF (SVXY) was consistent with its objective and reflected the changes in the level of its underlying index.”

Although XIV and SVXY have almost identical characteristics, the former is an ETN and the latter is an ETF. But this difference has nothing to do with SVXY surviving the “Black Monday” crash. Despite its apparent vulnerabilities, the decision to continue SVXY was a management one. However, there is no guarantee it too won’t be terminated in the future. Based on the stock market’s recent performance, another test of volatility could be just around the corner.

 

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 738 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Market Overview

Bitcoin in Backwardation (this is fine)

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Bitcoin Options

Hi Everyone,

One of the joys of having a futures market is the ability to understand what investors are thinking about the future of the price. For bitcoin, it doesn’t seem so great at the moment.

As we can see, the contracts for the bitcoin futures on the CBOE are currently in backwardation, meaning that contracts with a later expiration are trading consecutively lower.

Of course, something like this might have made me nervous on a normal day, but then I remembered that oil futures were trading in contango (opposite of backwardation) before the prices collapsed back in October.

Also, the volumes here are kind of silly. I mean, 227 BTC (less than $1 million) trading on a contract that expires today. Sure, the title is catchy but what can we really learn from this?

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Shutdown: Day 26
  • Day’s to Brexit: 72
  • Constantinople Delayed

Please note: All data, figures & graphs are valid as of January 16th. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

You may have noticed that we’re now including a countdown to Brexit in the highlights section, right next to the US government shutdown counter. I think they fit together neatly. Two governments descending into a state of turmoil over political wrangling.

Today, Theresa May’s government will see the ultimate test. If she loses the vote of no confidence, the UK heads to new elections… again.

Over in the East, China decided to inject the market with a record level of stimulus. Yesterday’s tax cuts may have been insufficient to maintain growth, so they’ve gone the route of free cash for the market.

In addition, it seems the Institue of International Finance has made a rather shocking estimation. It seems our entire economic system, from our homes to places of work and our governments are increasingly reliant on debt.

Given all the above, it’s no wonder that the European Central Bank is now sounding a new alarm.

Don’t worry about any of this though. The stock markets are up today. Hope the earnings reports from the financial sector go well.

Ethereum Upgrade Delayed

After all the excitement, the crypto community was disappointed to hear last night that the long-awaited Constantinople upgrade has been delayed once again.

It seems a critical bug was found at the last minute and the lead developers pulled the plug. Here we can see the crypto market, led by Ethereum, dropping moments after the announcement was made

We’re seeing a bit of a recovery this morning but that was really scary. I mean, it’s good that they caught the bug before going live but the fact that it came within 30 hours of the upgrade is a bit nervewracking.

These things do happen, virtually all major platforms including Windows, Android, and Apple Operating systems, have seen critical bugs before. Though it would be possible to release a patch, fork the network again, and return to normal, that kind of process could in itself have done irreparable damage.

We hope that Constantinople whenever it is ready, goes through without any additional hitches.

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

eToro is a multi-asset platform which offers both investing in stocks and cryptocurrencies, as well as trading CFD assets.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,
Mati Greenspan
Senior Market Analyst

Connect with me on….

eToro: @MatiGreenspan Twitter: @MatiGreenspan LinkedInMatiGreenspan |Facebook:MatiGreen

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 142 rated postsSenior Market Analyst at Etoro.com.




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Market Overview

U.S. Stocks Rise on News of China Stimulus; Theresa May’s Brexit Deal Falters in British Parliament

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Wall Street and global stocks bounced back on Tuesday, as investors rallied behind a renewed stimulus push from the Chinese government in the wake of dismal trade figures earlier in the week. Meanwhile, U.K. Prime Minister Theresa May’s proposed Brexit deal was swiftly rejected by British parliament, setting the stage for a tumultuous two months.

Stocks Rally

All of Wall Street’s major indexes bounced back on Tuesday from a slow start to the week. The S&P 500 Index gained 1.1% to 2,610.30, with nine of 11 primary sectors reporting gains. Technology, health care and communication services were the best performers. Surging tech shares lifted the Nasdaq Composite Index to a gain of 1.7%, where it closed at 7,023.84. The Dow Jones Industrial Average advanced 155.75 points or 0.7%, to close at 24,065.59.

European and Asian markets also reported firm gains. The U.K.’s FTSE 100 Index rose 0.6% to 6,895.02. The pan-European Stoxx 600 finished 0.4% higher at 348.71.

Japan’s Nikkei 225 index rose 1% to 20,555.29. Mainland China markets surged 2%, with the CSI 300 Index closing at 3,127.99.

China Pledges More Stimulus

The rally in global stocks on Tuesday was partly owed to a renewed pledge by the Chinese government to stimulate a moribund economy. China’s finance ministry has announced a new plan to cut taxes and increase federal expenditures this year in an attempt to combat weaker growth. Meanwhile, the People’s Bank of China (PBOC) said it will make monetary policy more forward-looking and ensure that markets don’t face a liquidity crunch in the future.

In reality, China’s economic slowdown appears to be inevitable as Beijing shifts from exports and manufacturing toward consumption and services. This generational transition will likely see GDP growth decline further in the coming yeas as China’s middle class continues to grow. However, the presence of asset bubbles and a worsening trade outlook could hasten the decline.

May’s Brexit Deal a No-Go

British lawmakers overwhelmingly rejected Prime Minister Theresa May’s Brexit deal on Tuesday, setting the stage for a political fallout that could threaten the U.K.’s planned exit from the European Union in March.

The Brexit deal was soundly rejected in British parliament by a vote of 432 to 202. The scale of the defeat highlighted the extreme opposition facing the prime minister from both sides of the political divide. By failing to agree on the terms of Brexit, the U.K. faces an uncertain future with respect to the EU.

May still has three options for salvaging an exit agreement: (1) negotiate new terms with the EU and table a slightly different proposal; (2) hold a second referendum; and (3) call a general election.

Since taking over from David Cameron in 2016, May has faced an uphill battle satisfying living up to the hard Brexit mandate while also satisfying the pro-EU opposition. A botched early election in 2017 relegated her party to minority status in Parliament, which further complicated matters.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 738 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Market Overview

Moment of Truth

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Hi Everyone,

What can I say? The adoption of crypto by large scale financial institutions is taking longer than expected but is still on track.

The bear market certainly caused some to hesitate but today we have confirmation that things are moving forward as planned.

The Wall Street backed service Bakkt, which plans to allow clients to store and spend crypto in a user-friendly and secure way, has clearly demonstrated that they are going ahead despite delays caused by the partial US government shutdown.

In this blog post yesterday, Bakkt CEO Kelly Loeffler announced their first strategic acquisition. The Chicago based company they’re buying is Rosenthal Collins Group, which boasts more than 100 years experience in the financial services industry. The deal, which is set to be finalized next month, will see RCG’s team completely integrated into the young crypto company.

Meanwhile, in Switzerland, a country that is way ahead of the curve on crypto adoption, a major financial institution known as Vontobel has announced their own crypto custodial service and digital asset vault, which is available for their clients now.

My friends, institutional adoption of cryptoassets is finally upon us.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Shutdown: Day 25
  • Brexit Vote Day
  • Ethereum Upgrade Tonight

Please note: All data, figures & graphs are valid as of January 15th. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

Stocks are up today on the news that China will be following in Trump’s footsteps and stimulating their economy with massive tax cuts.

As economic conditions tighten around the world, one of the only solutions left for many countries to encourage spending is to cut taxes.

Of course, the long term effect of these type of actions is usually to increase the national deficit as the world’s largest economies sink further into staggering debt. But that doesn’t necessarily need to be an issue as long as they keep making their payments on the debt.

The rally seems to be holding into the European session and even the safe havens like Gold, Swiss Francs, and the Yen are pulling back.

Today is the 25th day of the partial US government shutdown with no end in sight. We’ll also hear from Mario Draghi at 16:00 in France. Let’s hope for some strong earnings reports from the financial sector today and tomorrow.

Brexit Vote

Bigger than all of that though, at least in the UK, is the critical vote on Theresa May’s Brexit plan, which is scheduled to take place around 19:00 London time.

Consensus seems to be that the vote will not carry and some are even predicting the worst upset for a Prime Minister in British History, which does seem a bit exaggerated to me.

Due to the potential impact on the markets many brokers, including eToro, have limited the maximum allowed leverage going into the event on all UK stocks and most major currency pairs. For details of how trading will be affected, please check out @eToroTeam page for updates.

Something tells me though, that this may not be as big as people are preparing for. First, the fact that brokers are limiting leverage in itself should reduce volatility. Second, if the announcement is already set to upset then there shouldn’t be much surprise to the markets. You never know though.

Upgrade Time for ETH

At block #7080000, which should happen sometime tomorrow night, the Ethereum network will undergo a hard fork.

Hard forks might seem difficult to understand because we’re so used to centralized computing, but in a decentralized world, the only way to make a major upgrade is to fork it.

For example, when Microsoft wants to upgrade from Windows 9 to Windows 10, they have their dev team write the code, and then users upgrade one by one in their own time. In decentralized computing, the entire network needs to upgrade together.

A hard fork is like a copy-paste action, where a new blockchain is born and if all goes well, the old one dies.

Sometimes, when there is a disagreement among the community about the upgrade, some members will choose to keep the old version of the blockchain alive and we see a split. The most famous cases of this was when Bitcoin Cash split off of Bitcoin on August 1st 2017 and when Ethereum split with Ethereum Classic back in 2016.

However, the Constantinople upgrade has already received widespread backing from the entire community and so we hope everything goes smoothly. It’s important to note that there is no action required by the end users. If you are holding ETH on eToro or any wallet or exchange, the upgrade should be done for you automatically.

By this time on Thursday, we should have a brand new Ethereum, which is faster, cheaper, and has 33% less inflation.

Let’s have an excellent day.

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

eToro is a multi-asset platform which offers both investing in stocks and cryptocurrencies, as well as trading CFD assets.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,
Mati Greenspan
Senior Market Analyst

Connect with me on….

eToro: @MatiGreenspan Twitter: @MatiGreenspan LinkedInMatiGreenspan |Facebook:MatiGreen

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 142 rated postsSenior Market Analyst at Etoro.com.




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