Monday, 12 November, 2018

Credit Suisse Roiled by Volatility Bet

Bloomberg’s Luka Kawa Joe Weisenthal discuss volatility and the market selloff on short volatility products Bloomberg’s Luka Kawa Joe Weisenthal discuss volatility and the market selloff on short volatility products
Patty Aguilar | 08 February, 2018, 00:44

"(Volatility-linked ETPs) are the easiest way for long portfolio managers to hedge their portfolio", said Seth Golden, the Ocala, Florida-based president of Finom Group, who rose to fame a year ago after the New York Times profiled the former logistics manager for discount store retailer Target who started trading volatility products.

The long-awaited pullback following soaring equity markets may have taken its first step this week and low volatility ETFs have been impacted.

"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", the statement said. Susquehanna International Group LLP raised its position in Credit Suisse AG - VelocityShares Daily 2x VIX Short Term ETN by 103.8% during the 2nd quarter.

The VIX rocketed over 50 Tuesday, setting the stage for another rocky day on the Street.

The XIV was halted Tuesday, and Credit Suisse subsequently issued a press release saying it will be delivering an irrevocable call notice to The Depository Trust Company for the XIV on February 15. The RSI, or Relative Strength Index is a popular oscillating indicator among traders and investors.

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The most-baffling thing about XIV was why it was trading at $99 at the close. "If an Acceleration Event occurs at any time with respect to any series of the ETNs, we will have the right, and under certain circumstances as described herein the obligation, to accelerate all of the outstanding ETNs of such series".

Larry McDonald, founder of the Bear Traps Report, warned that such a huge spike in volatility could have a cascading effect. Average returns are minus 5% so far this year. For example, XIV doubled in size in August.

As of this writing, both XIV and SVXY were halted for trading, but were expected to resume trading later in the day. They're just numbers. Derivatives exists to bet on where the numbers will be in the future, but for many investors a more attractive option was a product that could be traded on an exchange. Filings from back in September show Credit Suisse, Deutsche Asset Management, Citadel Advisors, Flow Traders, and Two Sigma as the top holders.

"The holdings jumped from short 988 Feb contracts to short 4,758 Feb contracts and from short 2,418 March contracts to short 14,317 March contracts", notes Peter Tchir, head of macro strategy at Academy Securities Inc. (NASDAQ: CBOE), which of course operates markets for numerous options that trade hands, was last seen down 11.4% at $115.65 on more than four times normal volume of 4.3 million shares as of noon Eastern Time.

Rumors of the death of the short-volatility funds have been greatly exaggerated.

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