Problems with SVXY & Short Volatility ETNs (Preview)

By Lawrence G. McMillan

Short volatility strategies attract traders seeking profits during low or decreasing volatility periods, making them appealing in quiet market settings. This appeal has contributed to the renewed popularity of Short Volatility ETNs such as SVXY today.

The previous popular Short Volatility ETNs, XIV, famously imploded when volatility nearly doubled in one day. We had previously cautioned about this risk in two articles you can find here and here. Although SVXY has a lower multiplier (0.5 compared to XIV's 1.0), there remains a risk akin to XIV's downfall.

XIV faced potential obliteration if $VIX futures doubled in a day, which indeed occurred in February 2018, possibly due to market manipulation. If $VIX futures were to triple in one day, SVXY would fall to zero. That is if $VIX rose +200% in one day, SVXY would fall half of that amount, or 100%. That’s why we use options when trading SVXY – the risk is fixed.