Attempt at TVIXF Short Squeeze Fizzling Out

Amidst all of the market turmoil following the Reddit wallstreetbets efforts to put a massive short squeeze on the likes of GME, AMC, BBY, EXPR, KOSS, BB, etc., it was just a matter of time before this same short squeeze template was applied to ETPs.  On January 28^th, silver became a short squeeze target and the primary silver ETP, SLV, was suddenly in the crosshairs and trading volume spiked about 10x.

On Monday, the OTC remnant of the venerable TVIX ETN, delisted by Credit Suisse on July 12, 2020 and now trading under the TVIXF ticker, became the target of yet another copycat short squeeze effort.

Yesterday, Yacob Peterseil of Bloomberg summarized the developments in the TVIXF short squeeze attempt in the aptly titled, A Onetime Giant of Volatility Has Gone Haywire in OTC Trading.  Peterseil noted that only 7% of TVIXF’s outstanding shares have been sold short, which dramatically limits the potential success for a short squeeze.  In the article, I am quoted as not being surprised that an attempt was made to squeeze the TVIXF shorts given the success of previous short squeeze efforts, but I also note that an effort to squeeze the shorts is very risky for longs in that the last time there was a similar undertaking, Credit Suisse declared an acceleration event and crushed the longs.  It is the risk of an acceleration event that forces the price to the indicative value (IV) – a feature that is unique to ETPs and does not apply to single stocks – that makes shorting ETPs much riskier.

The historical reference above is to DGAZF, which went from about 400 to about 25,000 in one week during a short squeeze in August 2020 when the indicative value was near 200.  The decoupling of the market price on the OTC from indicative value was in large part due to the cessation of the ability to generate new creation units and thus the ability to use shorts to arbitrage any difference between the market price and indicative value.  With large losses incurred by investors and the associated bad publicity, Credit Suisse elected to accelerate DGAZF.   As noted above, the acceleration of the note was executed at the indicative value price, not the market price:  “As described in the Pricing Supplement, investors will receive a cash payment per ETN equal to the arithmetic average of the closing indicative values of the ETNs during the accelerated valuation period.”  As a result of the acceleration to the indicative value, investors who saw DGAZF trade at 125x its indicative value were exposed to a 99.2% loss.

Not surprisingly, the TVIX prospectus and pricing supplement has essentially the same language regarding acceleration at indicative value as DGAZ, with the pricing supplement noting no less than a dozen times that in an acceleration event, the redemption price reverts to indicative value rather than the market price. 

If some of this talk of short squeezes, premium to indicative value and suspension of creation units sounds familiar, this is not the first time it has happened to TVIX.  I covered the initial instance of the suspension of creation units in TVIX at length back in 2012, when most investors were still not familiar with the intricacies of indicative value, creation units, the potential for short squeezes and the potential for market prices to decouple dramatically from indicative value.

In the graphic below, I show the recent uncoupling of TVIXF from TVIX.IV (TVIX’s indicative value) and the premium that has developed as a result of the short squeeze peaking at 44% on Monday and falling back to 29% as of today.  The key takeaway for longs is that at any point in time, Credit Suisse can do as they did with DGAZF and declare an accelerating event, forcing the distorted OTC market price back down to indicative value in a hurry.

[source(s):  Yahoo, VIX and More]

Further Reading:
The Resurrection of TVIX
TVIX Premium to Indicative Value Creeping Back Up
TVIX Creation Units Return; What It Means for Investors
Is TVIX Now Just a More Docile UVXY?
Recent TVIX Volume and VIX Futures Volume
The Story of VIX ETPs Relative to their Intraday Indicative Values
The Ups and Downs of the New Premium in TVIX
Credit Suisse Suspends Creation Units in TVIX: What it Means
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
TVIX Topples VXX as Highest Volume VIX ETP
Who Is Trading TVIX?
Volatility Becomes Unhinged on Friday
TVIX Finally Getting Its Due As Day Trading Rocket Fuel
TVIX Trades One Million Shares for First Time
All About UVXY

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): none

ETPs Turn to Selling Options to Generate Income

Not long after I penned The Options and Volatility ETPs Landscape, Credit Suisse (CS) added another buy-write / covered call ETP to the mix: the Credit Suisse Silver Shares Covered Call ETN (SLVO).

With SLVO, Credit Suisse is essentially extending the methodology they pioneered with the Credit Suisse Gold Shares Covered Call ETN (GLDI). In the case of both GLDI and SLVO, the ETPs are selling covered calls against the underlying commodity ETF for gold (GLD) and silver (SLV) in an effort to generate some income, and in so doing, choosing to forego some upside potential. In both instances, the ETP starts selling covered calls with 39 days until expiration and completes the sales with 35 days to expiration. One month later, the ETP buys these covered calls back over a period ranging from five to nine days prior to expiration. The net proceeds of these covered call transactions are then paid out as a monthly dividend. This dividend payment is not guaranteed and can fluctuate substantially from month to month. In the first four months following its launch, the monthly dividend for GLDI has been 0.1146, 0.0724, 0.1319 and 0.0572.

As silver is generally much more volatile than gold, SLVO elects to sell calls that are 6% out-of-the-money, while GLDI sells calls that are only 3% OTM. Other than this difference in strike selection or moneyness, the strategies employed by GLDI and SLVO are essentially the same.

Of course, covered call strategies work best when the price of the underlying is flat or when the underlying is appreciating slowly. During the recent sharp drop in GLD and SLV, the covered calls did provide a small amount of downside protection, but with GLD falling 13% over the course of just two trading days last month, the downside protection offered by a covered call was barely more than a rounding error. Covered calls and buy-write strategies generally outperform a long position in the underlying in all instances except when the underlying experiences a strong bull move.  (See graphic below for details.)

Thinking more broadly, the introduction of GLDI and SLVO should reinforce the idea that with ETPs now spanning a wide variety of asset classes and alternative investments, covered call strategies can be implemented in many non-traditional ways. The most popular of the traditional methods is PowerShares S&P 500 BuyWrite (PBP), which sells covered calls against the popular equity index. There is no reason, however, why there cannot be a similar product that sells covered calls against more volatile groups or sectors, such as emerging markets (EEM), small caps (IWM) or semiconductors (SMH), just to name a few. One can even bring alternative assets under the covered call tent. I’m not talking just about the likes of crude oil, copper or corn, but why not have covered calls on real estate, currencies or even volatility ETPs?

Better yet, why stop at covered calls? A strategy that I have discussed here on a number of occasions is selling cash-secured puts. The recent launch of U.S. Equity High Volatility Put Write Index ETF (HVPW) brought the put-write strategy into the ETP marketplace.  It is unfortunate that put-write strategies have not found a wider audience at this point or they too would be ripe for extending beyond the comfortable confines of the S&P 500 index.

Assuming this market eventually stops going up almost every day, investors are going to have to look for other ways to grow their portfolio and the scramble for yield will no doubt intensify. With ETPs now selling options to generate income, investors may want to look at some of the shrink-wrapped products mentioned above or consider how they might wish to implement similar strategies on their own.

[source(s): StockCharts.com]

Related posts:

• The Options and Volatility ETPs Landscape
• Opportunities Arising from Unusually Low Volatility in Gold
• Recent Developments in Gold and Gold Volatility
• Silver Volatility Rises Over 50
• Is Volatility a Better Play for Silver than Direction?
• Covered Calls Finish Strong in 2011
• The Value of Selling Covered Calls
• Surfing for Weekly Buy-Write Trades
• Sideways Markets, Covered Calls and the RUT
• BEP and the Joy of Covered Call Funds
• One Approach for Volatile Sideways Markets
• The Often Overlooked Put Writing Strategy
• Graphical Comparison of Performance of PutWrite and BuyWrite Indices
• More on PUT Returns

Disclosure(s): long GLDI and HVPW at time of writing

Reader Q and A: Straddles and Implied Volatility

Right before the close last Wednesday I placed an ATM straddle that proved to be profitable and I closed it after the IV spike on Thursday. I shouldn't have come back for more, but I placed another ATM straddle Monday before the close and even with the huge drop in price on Tuesday the IV collapse only allowed me to break even. These were my first two super short term volatility trades and now I now that the free IV data on the CBOE's website is an end of day service... definitely wouldn't have placed that trade on Monday afternoon. Seeing now that I possibly should have been doing the opposite, shorting volatility, do you suggest any strategies that aren't outright short and don't require a big amount of margin to be put up? 

Also, what service do you use to view real-time IV for ETFs and such?

Adam C.

Hi Adam,

As a newbie, you should make an important distinction between options trades that have unlimited risk and those that you should characterize as limited risk or defined risk. Shorting 10 SLV July 47 calls theoretically opens you up to unlimited risk because SLV can continue to go up and up. Should this happen, depending upon your cash cushion, eventually your broker will hit you with a margin call and you will be forced to cover at a significant loss.

Take the same basic trade and add a second leg as a hedge and your unlimited risk is now limited. Instead of a naked short, a bear call spread involving 10 short SLV July 47 calls plus 10 long SLV July 50 calls caps your loss at the distance between the two strikes. Here that is 50-47 or three points. Three points times 10 options (with a 100 multiplier) puts your maximum loss at $3000.

Make that trade right now and for 10 contracts you should receive a credit of about $1.20 for that spread, so that means your maximum profit is $1200 and maximum loss is $3000 - $1200 or $1800.

This is a directional bet. For a non-directional bet – meaning that you expect SLV to be at about 47.00 at the time of the July expiration, you should probably focus on condors and butterflies, which are essentially the limited risk version of strangles and straddles. Sometimes you will hear a trader refer to “buying the wings.” What that means is they are converting an unlimited risk strangle or straddle into a limited risk condor or butterfly by buying out-of-the-money legs to hedge their risk, just as was the case with the call spread example above. As a matter of fact, one way to think about an iron condor is that it is just a bear call spread plus a bull put spread. Early on I used a more generic label of vertical credit spread on the blog for these strategies. You should be able to follow any of these links to get more information.

An even better way to get up to speed on these strategies is with some online resources. A good place to start is with the Options Industry Council (OIC), where they have an Options Strategy Index. Click on any strategy diagram for more information. Among the many great resources out there, I can highly recommend the CBOE’s Options Institute, where you might want to start with their tutorials. Keep in mind that the options brokers also do an excellent job of educating their customers on options strategies. Two that put a great deal of effort into education are optionsXpress (Education Center) and thinkorswim (Swim Lessons).

Also, the links below should provide some specific posts that will give you some food for thought regarding your recent SLV (?) trade and some alternative approaches.

In terms of real-time IV, I use Livevol Pro, which provides the graphs that I use on the blog for implied volatility and historical volatility. Your favorite options brokers (thinkorswim, optionsXpress, TradeMONSTER, Options House, Trade King, etc.) should also have good real-time or nearly real-time IV data. If you don't have an account at a broker that specializes in options, I highly recommend you open up one with at least one of the brokers mentioned above so you can get your data and place your trades on the same platform.

Related posts:

• Learning About Options (1) 
• Learning About Options:  The Exchanges (2)
• The Options Opportunity Matrix
• Selling Fear with a DryShips Bear Call Spread
• The Sideways Play
• Straddles vs. Iron Butterflies
• SPX Range-Bound Chart
• The Elusive Trading Range
• Strangle Pong
• Strangle Pong Update
• Strangle Pong Post-Mortem
• Pre-Geithner Financial Butterflies

Disclosure(s): Short SLV at time of writing; Livevol, CBOE, optionsXpress, TradeMONSTER, Options House and Trade King are advertisers on VIX and More

Silver Implied Volatility Rises Over 50

Yesterday, in the awkwardly titled Is Volatility a Better Play for Silver than Direction? I noted that silver implied volatility had managed to push to heretofore unseen heights and argued that future projections based on SLV options prices had led to a high probability short volatility setup.

Of course, no sooner had I posted than SLV began to climb rapidly in price, bringing implied volatility along for the ride. The pattern has continued for the first half of today’s trading session, with silver futures above $49/oz. and the SLV ETF pushing above 48.

The chart below, from Livevol.com, shows the intraday price and implied volatility (red line shows implied volatility for May options) action in SLV for the past five trading sessions. Note that for the most part, silver implied volatility has had a strong positive correlation with the price of the underlying ETF. This is largely because silver is making new highs and traders see the potential for a big move should silver futures break out above $50/oz.

In terms of trading, I still like the idea of a short volatility play on silver and am currently actively managing several positions with both a volatility and directional component.

For directional traders, the lure of huge momentum play is often too much to resist. For options traders, who are essentially trading volatility more than anything else when all is said and done, playing volatility Whac-A-Mole can be similarly enticing. If you jump on this trade, just make sure you are the one doing the whacking…

Related posts:

• Is Volatility a Better Play for Silver than Direction?
• The Options Opportunity Matrix
• The Sideways Play
• Straddles vs. Iron Butterflies
  

[graphic: Livevol Pro]

Disclosure(s): Short SLV at time of writing; Livevol is an advertiser on VIX and More

Is Volatility a Better Play for Silver than Direction?

It seems as if everyone in the world has an opinion about silver. Is it a bubble? Has it topped? Is it just consolidating before it goes to triple digits?

I have been trading silver directionally with a trend-following approach for many months, but recently exited all my long positions when I came to the decision that a top was imminent.

Still, silver looks way too attractive for me to sit on the sidelines, so now I am trading silver volatility instead of a directional play. The chart below from Livevol.com neatly illustrates my rationale.

Looking at the silver ETF, SLV, for the past six months, one cannot help but observe the ever-widening gap between implied volatility and historical volatility that has developed during the latter half of March. While it is certainly understandable that there is a great deal of uncertainty about the price of silver going forward, given the extreme recent volatility, I find it hard to believe that traders are betting silver will be about twice as volatile in the next month as it has been over the course of the last month.

For me this is a classic short volatility setup, with straddles, strangles, butterflies and condors looking to be pricing in an excessive amount of volatility. One need not necessarily structure those short volatility trades with the current price of SLV (about 44.18) at the midpoint of the spread. If one thinks silver has topped, why not sell a straddle at 43 or a strangle with a 40-45 spread? For now my focus is primarily a non-directional short volatility play, but one can also make a good case for a short volatility trade with a small directional twist, at least as I see it.

Of course, silver always presents some interesting pairs trading possibilities, typically with gold, but given the recent positive correlation between silver and stocks, an interesting approach is to look at short silver trades as a hedge for long equity positions.

Related posts:

• The Options Opportunity Matrix
• The Sideways Play
• Straddles vs. Iron Butterflies
• SPX Range-Bound Chart
• The Elusive Trading Range
• Strangle Pong
• Strangle Pong Update
• Strangle Pong Post-Mortem
• Pre-Geithner Financial Butterflies
  

[graphic: Livevol Pro]

Disclosure(s): neutral position in SLV via options at time of writing; Livevol is an advertiser on VIX and More