The opinions expressed in these forums do not represent those of C2, and any discussion of profit/loss
is not indicative of future performance or success.
There is a substantial risk of loss in trading. You should therefore carefully consider
whether such trading is suitable for you in light of your financial condition. You should read,
understand, and consider the Risk Disclosure Statement that is provided by your broker
before you consider trading. Most people who trade lose money.
Hey all, just wondering if anyone had any insights about the recent divergence between SPY and XIV, and also today’s wild XIV ride while all the other major Vol ETPs were quiet?
I realize that SPY and XIV don’t always move in tandem, but over the last 2 weeks, SPY has gained about 4% while XIV has lost about 4%. So, when’s the last time that happened over a 2 week period when SPY was within 2% of its high? Never! I do see 3 occasions where there were similar dynamics, just not with as extreme SPY moves: March 2014 was the most recent (XIV was slow to catch on to the SPY rebound, but when it finally did, it took off). Before that it was May 2007 (using simulated XIV values), and July 2007 (also simulated values), which were the two mini-peaks before the big peak before…well you know. Yes, I know simulated values aren’t the real thing, but I think it’s at least interesting. I’m curious if anyone can read the tea leaves on this one?
Also, in the first 2 hours of trading today XIV spiked almost 3% from yesterday’s close while SVXY gained less than 1%, only for XIV to lose it all and then some by the close and SVXY end the day with gains. I’ve never seen the XIV premium/discounts swing so much in one day…and become so unhinged from SVXY. Any thoughts or insights on that?
Fascinating question David. I’m not a VIX (or XIV) guy per se but I have recently seen the same thing play out in SPX options and have wondered about it (so far, it has been a good thing). Since the price of XIV is affected by VIX futures which itself is dominated by SPX options, my first hunch would be that institutional money is starting to take protective measures in the derivative market for a possible downturn. When I was involved with a large pension fund, we made our asset allocations using a futures overlay program instead of actually buying and selling the underlying stock. There was a cost to that but it was very quick and easy to do. This was in the late 90’s when the market was roaring like it is now. I can’t remember many specifics on volatility, but I’m sure there was some impact like what you’re seeing today. Hopefully that will mitigate any crazy pullback. I just hope counter party risk among investment banks is not what it was in 2008. I need to think more about this since I think gold plays into this and I do trade gold along with the ES.
David, I’m glad you raised this. I have a few observations: (1) realized volatility involves moves in the S&P500 in either direction, so the parabolic and significant UPWARD moves are properly recognized as comparatively high daily % moves compared to the past year, and setting the stage for further volatility going forward which could be in either direction; (2) it’s clear from the large changes in the number of creation units in VXX over the past few days (15%+ daily moves in both directions) that there’s more than just retail traders swapping ETFs but rather some big players moving in and out of the space; (3) the political volatility seems to be registering more now for whatever reason. Keeping an eye on these factors has kept my strategies (XIV Timer, Fast Nickles and My 3 Best Ideas) moving between cash and long volatility over the past week rather than being long vol.
I have been puzzled as well by the differences between the market overall and XIV in the last week or so. It’s interesting that you note that XIV was moving differently than other vol ETNs or futures, such as SVXY.
As one of your earlier posts implied, getting more cautious isn’t necessarily the right response. The intraday drop on Wed or Thurs didn’t hold (it rebounded), but the drop would have washed out anyone who was feeling more cautious about holding XIV than usual.
A lot of institutional investors were playing the long XIV game and making a lot of money doing it, which would tend to increase the price of XIV (see the large premium discussed below). Maybe that trade is being dropped in favor of just going long the market in a leveraged fashion. Or maybe the smart money is getting more cautious, driving up the cost of buying puts or shorting futures on the underlying market.
Given that the NAV is very high, I suspect that demand for XIV remains very strong, but the odd divergence between SPY & XIV is being driven by something going on in underlying stock futures or put options. Maybe portfolio managers are buying “portfolio insurance” while letting their long stock positions run.
Does anyone happen to know where I can get historical NAV data for XIV, preferably free? I might try to model the premiums.
Vance Harwood was discussing the strange premium for XIV over the IV for a time yesterday. It eventually partially evaporated. Interesting times for sure. https://twitter.com/6_Figure_Invest
It seems VelocityShares is allowing XIV to run ahead of its NAV far more than usual without stepping in to correct the price. The premium compared to the NAV has been upwards of 2% for a while now.
Did VS change their policies regarding price correction at any point recently?
In any case the rise of XIV to 141 yesterday also raised eyebrows over here.
Thanks for the link to ETF.COM. They have a chart of the premium of XIV over NAV, but I didn’t see where to download the data. Nor have I been able to find anywhere else that gives away that data for free.
In looking at the chart, until recently XIV’s big deviations from NAV seem to have been the immediate result of big price swings, not necessarily a predictor of them. But without running numbers myself, it’s hard to tell.
You are correct QM, it does not appear predictive of next-day results (from the open). There is no data download, I just manually pulled each day back 12 months. What it does point out is that when you compare XIV and SVXY, which are not identical in structure but which otherwise track each other very closely, there are times…like now…when a short vol position would better be accomplished using SVXY instead of XIV.
Current indicative data is available on Yahoo Finance for SVXY and VXX under tickers SVXY-IV and VXX-IV. XIV-IV seems broken however as it hasn’t been updated since June 1st.
Friday’s price action provided a nice scalping opportunity of XIV’s premium. I’m just wondering how much of these situations will occur in the future. It’s definitely worth keeping track of though.
Correct, both track the SPVXSP index.
In fact the difference between XIV’s and SVXY’s premium has only gotten bigger since Monday.
I’m in the process of reconstructing the historical NAV prices (using historical prices for SPVXSP) in an attempt to find other periods of such divergence. I have gone back 1 year already but so far it only proves the abnormality of the current one, since before January both NAV’s seem to track each other quite well.
Here’s a graph showing the (inverted) premium (SVXY in blue, XIV in red).
A little bit different take on it (but much easier data to pull together), this graph below shows the variance between 20 day returns of XIV vs SVXY, with a little smoothing. Based on this, the recent divergence is really unprecedented. It may indicate the influence of new retail investors betting on a XIV reversal before the institutional investors are willing to via the futures; or maybe it’s more of a technical situation with arbitrage opportunities being more expensive to execute. It does look like in most cases historically there may have been some opportunity to take advantage of the snap-backs from elevated divergences. And I do see that IB has XIV short shares available if one wants to play the gap.
Based on this data, the divergences don’t seem to be indicative of general volatility over or under performance. The average XIV next day return when the divergence is is greater than 0.5% is about the same 0.28% as the normal average next day return over that same period, but the average SVXY next day return is 0.37%, so a bit of an advantage.
Great discussion. I’ve integrated the discount / premium element into my XIV Timer strategy . It enabled me to use SVXY instead of XIV on yesterday’s entry and enhance returns to my subs.
