RIP XIV and SVXY

A couple of whiles ago, I answered a question on XIV and SVXY. The question was: is XIV the most dangerous investment in the world? In it, I said I would never hold any of them long-term and probably not even short-term neither.

In it, I stated that eventually, one day, XIV and SVXY would go to 0. Not down 75%, not down 90%, but down 99%. Unfortunately, it appears today might be this day:

Based on my understanding of this product and the market in general, I do not think either of them opens tomorrow morning. I think that some time tonight, Proshares/whatever will announce that they are closing the fund.

In other words, you’ll never see SVXY or XIV traded on any major exchange ever again. They are gone. Plain and simple.

So, what happened?

Well, let’s take a look at a few extracts of the article and see what happened:

With that in mind, my own personal opinion is that I would never invest in it. In my opinion, XIV is not a long-term hold. It can be traded for sure, but over the long term, the risk outweighs the reward. We’ll discuss why later.

Indeed.

Indeed, XIV is up nearly 6 fold over the last five years, easily crushing the S&P500 and pretty much every other asset class there is. But, there is a catch.

Basically, whenever you see something like that, you should know there’s a catch.

Again, indeed.

Although not 100% accurate, the comments above sum up the situation: if VIX went up too much, VelocityShares, the managers of XIV, would immediately liquidate the fund and keep whatever scrap is left. Thus, with XIV, you are risking 100% of your money at all times. Any time, the VIX could spike and XIV could go to 0.

… and I believe this is what just happened.

Even if companies do go bankrupt from time to time, no companies, or at least very few companies, are designed to fall by design. XIV, however, is designed to go to $0. It was basically set up to fail. Thus, while you earn great returns, you are literally holding a ticking bomb. Make no mistake: one day, it will explode.

To those of you who got caught with your pants down: I’m not gonna say you deserve it, because you don’t. But this is a major risk that you should have seen coming. Assuming you did invest when it fell to, let’s say, $30, you should have been selling and taking some of your profits as it went up. Why? Because this product had a 100% chance to go to $0.

right now, it is down 82% in afterhours after falling 32% during the day. Why? Because as I explained back then:

In the chat I’ve linked above, a commenter mentions that if the VIX jumped to 30, XIV would go to 0. This is incorrect. In order for XIV to go to 0, VIX would have to jump a bit higher than that, pêrhaps to 40 or 50 overnight.

It went from 17 to 37 today, very close to the “40 or 50” range I originally predicted.

Then, XIV would open with a negative value and it is likely VelocityShares would close the fund to avoid further losses.

After crashing so much, I think XIV very likely has a negative value and that proshares will have to take the loss. This would mean XIV is valued at -$10 or something like this right now. Don’t feel too bad for proshares, however, they pocketed incredible fees for the past 7 years while doing very little.

Even if there somehow is value left in SVXY, it’s doubtful the company would want the fund to continue operating. The value would be at something like $5 and since proshares takes a percentage as a fee, they would get very little money, if any. In my opinion, they will announce that the fund is closing down and that any remaining “net value” will return to shareholders.

Based on my experience, this “net value” is usually very little.

I fully expected a lawsuit against Proshares and Velocityshares (creator of XIV), but I don’t expect this lawsuit to go anywhere. The prospectus is clear and obviously well-crafted by skilled lawyers. I expect some small-to-medium size lawyer firm will jump on this opportunity and promise a massive payoff, or some class action, but believe me when I say you will never see a penny of this money. Best case scenario, those lawyers somehow convince Proshares to settle and pocket 95%+ of that money.

If I was Proshares, however, I wouldn’t settle and I wouldn’t give them a penny. Again, the prospectus, and the risks, were clear. If you lost money on SVXY, it’s your own damn fault. Sorry for being blunt, but that’s what it is. This day was going to happen sooner or later. Hopefully you managed to leave before today.

Speaking of today, what shocks me the most is that SVXY only crashed 33% during regular market. It is rather clear some big companies are holding this fund and are very slow to unload. In my opinion, at 4:30PM at most, it was clear SVXY was worthless. The fact that it still actively traded at $50-60 for so long is the most interesting aspect of this whole story. If you were a smart trader, you shorted SVXY all day long, since it was rather clear the fund was gone.

The VIX is unlikely to jump that high overnight, however. The biggest one-day jump was 64% during the financial crisis. If such a thing happened today, XIV would open down 64% or so the next day. Then, if volatility kept going up, XIV’s value would keep declining.

The VIX moved up 115% in what is certainly one of the most bizarre trading days, ever. I don’t expect it to stay up very long. In fact, I don’t think it will remain that high for more than a day. It’s stupid it got this high to begin with.

Eventually, a crisis will wipe XIV out, or at least crash it 95% (see scenarios above).

Yeah.

Buying XIV after a volatility spike is not a perfect solution neither; this is something I’ve discussed on stream, but the TLDR version of it is that you never know how high the VIX can go. There is no “upper limit” at which it will magically stop climbing. It could go from 10 to 20, then to 40, then to 60 and then to 80, etc. If you buy XIV at 5 after the crash, there is no reason it cannot go to 0.50 or lower.

The last point I wanted to convey, don’t feel tempted to buy this junk if it somehow opens at $5 or so tomorrow morning. It may recover, with some miraculous investment of funds or something, but it’s unlikely, and it could very well go to $0.50 as well.

Lastly, we could mention the possibility of a reverse split. If SVXY opens at $5, certainly Proshares could announce a 10:1 reverse split. While this would put SVXY at $50, this would not change anything to the fact that this is a product designed to go to $0.

Do I think SVXY will open trading tomorrow? Hell no. At the very least, it will be suspended for a couple of weeks. Ironically, shorters might end up having to put huge borrowing fees on positions they cannot close. Perhaps buying puts would have been better.

With that in mind, whether SVXY/XIV open down 99% or die, one thing is certain: SVXY and XIV are gone. I have no doubt proshares will relaunch them again one day, perhaps under the same ticker, but if you are invested in SVXY or XIV right now, this money is gone. Sorry to everyone who lost on this. Sincerely.

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