Friday, March 23, 2012

UPDATED--A Virtuoso Discusssion of the Recent Action in the VelocityShares Daily 2x VIX Short-Term ETN (TVIX)

Update below.
Original post:
Earlier today I said "I'm waiting for the folks at Alphaville to weigh in on this...."
It was worth the wait.
From FT Alphaville:

Gunfight at the T.V.I.X. Corral
There’s been a lot of talk about the carnage in the TVIX on Thursday. The VelocityShares 2x short-term ETN, whose creations were suspended by Credit Suisse on February 21 due to “internal limits”, fell 29 per cent. Curiously, the slide came just before an announcement from the provider that some level of creation would be reinstated.

Understandably, the idea that the re-opening was leaked ahead of time is now doing the rounds. After all, why would the ETN, which had been trading at an 80 per cent premium to NAV, suddenly converge with its indicative value for any other reason?

In fact, the whole thing has turned into a big mess.

Some say those Muppet enough to have gone long the TVIX after its creations were suspended probably deserved to be wiped out. It was, after all, the equivalent of  playing with fire. More to the point, it was obvious that eventually the TVIX would have to reconverge with the NAV:

We can’t help but agree.

What’s more, it’s clearly obvious that people were positioning for exactly such a move if you look at the short interest in the units:

But all this is really about two issues.

The first is about the soundness of the structure, and its suitability for a listing on a public exchange....MUCH MORE
TVIX Last Word (for today)