TVIX offers leveraged exposure to the VIX Index
VelocityShares Daily 2X VIX Short Term ETN is designed to return 2X, twice the daily performance of the S&P 500 VIX Short Term Futures Index.
The VIX Index and volatility products have been the domain of professional traders and institutions until just recently with the advent of VIX ETFs which have opened this market to retail traders.
VIX ETFs have become wildly popular products because volatility is now seen as a new asset class that can help investors diversify their portfolio, assess risks and determine the extent to which the return of an underlying market will fluctuate between now and a future date.
Given the myriad of factors impacting the financial system, such as interest rates, commodity prices, geopolitics, corporate earnings and the performance of emerging markets, just to name a few, investors realize that volatility always pays a visit to the stock market. That partly explains the growth and widespread adoption of volatility-as-an-asset in the form of VIX ETNs, which in one form or another trade the volatility of the S&P 500 futures market.
TVIX: An Introduction
One VIX ETN that has proven to be especially enticing for investors is the VelocityShares Daily 2x VIX Short Term (TVIX) ETN. The TVIX was issued by Credit Suisse in 2010 as a way for investors to trade volatility of the S&P 500 VIX Short-term Futures Index on a leveraged basis. Since there’s no way of tracking the CBOE VIX Index – the market’s chief volatility indicator – the TVIX tracks the next best option: VIX futures.
As a leveraged product, the TVIX tracks twice the daily percentage moves of the S&P 500 VIX Short-Term Futures Index, which is based on the prices of the next two near-term VIX futures contracts.
The potential for massive returns in a very short period of time is one of the biggest draws of the TVIX ETN. However, gains and losses are both amplified given the leveraged nature of this ETN and so a disciplined trading program and robust risk management are required for success in this market.
TVIX trades like other VIX ETNs in that it can be bought or sold anytime during regular market hours, including pre-market and after-market periods. With an average daily volume of over 20 million shares, TVIX has excellent liquidity with very low spreads. In theory, if the VIX rises 10% in one day, the TVIX would rise by twice that amount, which is 20%. In reality, however, the TVIX has a consistent tracking error of about 2%, which is higher than other volatility products.
TVIX Is All About Timing
When it comes to trading TVIX, timing is everything. It is best used by traders who have strong reason to believe that volatility will spike significantly in the short-term, which could lead to a quick profit. That’s why TVIX can be especially powerful in market corrections or around fundamental market events, such as interest rate announcements or important news releases. The combination of heavy losses due to its leveraged structure and fundamental element of contango in all VIX products make the TVIX best suited for short-term speculation. TVIX is widely considered to be unsuitable as a buy and hold or long term investment.
A Word of Caution About Leveraged Products
The high-risk, high-reward nature of TVIX is similar for all leveraged products, which seek to maximize profits over a short period of time. In the futures market, leverage allows traders to control large cash positions by investing only a small amount. While this gives them the potential to increase their earnings manifold, it also magnifies their potential losses. This is especially true for VIX products, which often experience very big price swings on a day-to-day basis.
All leverage products should be purchased only by experienced, knowledgeable traders who understand the potential gains and drawbacks of these instruments. By adding leverage to a volatility asset, traders’ positions will reset to 200% daily in the case of TVIX and -200% in the case of inverse volatility products, such as the XIV.
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