I Was Struck by a Black Swan and of Course Markets in Turmoil

I am an idiot.

Here’s the story.

I have a fascination with volatility. I don’t trade futures or options but have dabbled in a product called $XIV which is a hopped up futures ETF that crashes when market volatility explodes.

This afternoon market volatility exploded and that meant $XIV was in crash mode.

Here is what the Volatility Index (VIX) looked like as the markets closed:

In fact, today was one of the biggest moves if not the biggest percentage wise in the history of the VIX.

So, near the close I added some $XIV. Worse, I shared what I was doing. I always share what I am doing to keep me honest. In this case sharing was a bad idea as I am sure some people followed me.

Long story short, it seems like after hours, the product might be getting liquidated. Credit Suisse has the right, according to the prospectus, to liquidate the ETF in the event of an 80 percent move in the ETF, which after hours seems to be the case.

I could list 100 things wrong with the the idea, the product and the participants that float this ETF to the public, but it won’t change much.

The real lesson is to use actual futures and options directly when you want trade volatility and not some lame product put together by marketing departments of banks and fund providers.

This is truly a Black Swan event and there are will likely be much bigger market repercussions over the months ahead. The stock market is now only down eight or so percent from it’s all-time highs, but billions of retail investing dollars will be wiped out overnight in these ETF products. While we are still in a major market uptrend, Wall Street has managed to create an ETF that implodes on a rather normal market occurrence.

PS — On the bright side…it only took two bad market days for CNBC to run their go to panic special ‘Markets in Turmoil’ which they promoted all afternoon on Twitter. That’s bullish for the markets, but after my lesson today, not something worth betting on with an ETF or derivative.


Originally published at Howard Lindzon.

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