Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

A Onetime Giant of Volatility Has Gone Haywire in OTC Trading

Published 02/02/2021, 14:05
Updated 02/02/2021, 14:27
© Reuters

(Bloomberg) -- On a day when U.S. stocks rallied the most in two months, a leveraged note that should struggle when markets are rising did something unusual: It surged 21%.

Even as the value of its underlying holdings dropped, the VelocityShares Daily 2x VIX Short Term soared Monday to the highest since Nov. 3. While these days it trades over-the-counter with the ticker (OTC:TVIXF), the note is perhaps best known to most as TVIX, once one of the largest exchange-traded volatility products in the world.

The gain came out of the blue for TVIXF, but was perhaps inevitable. The note has existed in a kind of limbo ever since issuer Credit Suisse Group AG delisted it back in July. In the process, the Swiss bank suspended new share creations, meaning arbitragers can’t push the price back in line with its intrinsic worth.

As a result, TVIXF was trading at a 44% premium to its fair value on Tuesday.

It echoes an incident back in August, when a natural gas note known as DGAZF -- which was delisted alongside TVIXF -- jumped more than 6,000% in a matter of days. That spurred short sellers to take to Twitter, claiming they faced huge margin calls to cover their positions.

It’s possible a similar scenario is now playing out with the volatility note.

“If anyone wants an intriguing short squeeze idea and if familiar with the DGAZ story, I can see the attractiveness of at least giving a short squeeze a shot,” said Bill Luby, chief investment officer of Luby Asset Management and an expert on volatility products. But “this should be too risky for sophisticated investors -- too much like playing Russian roulette,” he said.

Read more: A 6,150% Surge in OTC Trading Sparks Liquidation of Delisted ETN

The $157 million note is a leveraged play on near-term futures on the Cboe Volatility Index, otherwise known as the VIX Index, or Wall Street’s fear gauge. It’s a popular way to hedge against market crashes, so it’s possible the moves were caused by investors betting on more turmoil.

But it’s also a tool for short sellers who seek to profit from calmer markets and the gradual decay of its holdings, and some 7% of TVIXF’s shares are sold short, according to S3 Partners LLC.

Several of the latter have surged in recent days, most notably GameStop Corp (NYSE:GME)., which was a buying target of retail investors seeking to punish hedge funds that bet against it.

Since being delisted, TVIX has lived on in over-the-counter markets, a wild west of trading where prices can quickly get out of whack. “$TVIXF should be in exactly nobody’s portfolio,” tweeted Dave Nadig, chief investment officer of ETF Trends.

In August, Credit Suisse eventually redeemed DGAZF at an average of its indicative value over several days, providing relief to short sellers but hitting traders who bought the note at inflated prices.

Candice Sun, a spokesperson for Credit Suisse, declined to comment.

©2021 Bloomberg L.P.

 

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.