What Really Happened with TVIX

March 23rd at 9:33am by John Spence

VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) is in a two-day meltdown because the premium to net asset value is snapping back sharply after surging as high as 90% earlier in the week.

The nosedive in TVIX has perplexed some because the CBOE Volatility Index, or VIX, actually rose on Thursday, and stocks were flat at Friday’s open.

Known as Wall Street’s fear gauge, the VIX rises when investors are seeking protection in the options markets.

Here’s the deal with TVIX: The exchange traded note is issued by Credit Suisse, which decided to temporarily suspend the creation of new shares in February due to size limits after investors poured money into volatility products. [TVIX Falls More After Credit Suisse Restarts Issuance]

Such a move can lead to premiums or discounts to net asset value. TVIX was trading at a premium based on demand for the ETN. In other words, there was limited supply after share issuance was halted. It’s also more difficult to short TVIX when shares are scarce or unavailable to borrow.

TVIX’s premium to indicative value surged to 90% on Wednesday, an all-time high.

However, the premium collapsed on Thursday, which is why TVIX dropped nearly 30% even though the VIX rose. The exchange traded note was down 18% in early action Friday.

Credit Suisse after Thursday’s closing bell said it plans to reopen issuance of TVIX on a limited basis.

Starting Friday, Credit Suisse “may from time to time issue the ETNs into inventory of its affiliates to make the ETNs available for lending at or about rates that prevailed prior to the temporary suspension of issuances of the ETNs,” according to a press release. “Also, beginning as soon as March 28, 2012, Credit Suisse may issue additional ETNs from time to time to be sold solely to authorized market makers.”

The bottom line: TVIX is being strongly influenced by factors outside the movement of VIX futures. [Why a Volatility-Linked ETN is Diverging from the VIX]

VelocityShares Daily 2x VIX Short-Term ETN


The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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