Beware Of Huge Premiums On TVIX So You Can Avoid Big Losses

David Dierking

With Credit Suisse's announcement that it is effectively sunsetting its ETN lineup, investors are left scrambling to VIX-linked exposure. The VelocityShares Daily 2x VIX Short-Term ETN (TVIX), probably the biggest and best known of the affected ETNs, can still be traded up to the July 12th delisting (and technically beyond that but not easily or cheaply), but expect trading action to get more volatile.

And dangerous.

Credit Suisse is no longer issuing new shares of TVIX, so that is leaving investors scrambling to get a hold of existing shares. As is the case with just about anything that experiences a supply crunch, some traders are paying above market prices for TVIX shares.

TVIX often trades at a discount of premium to its NAV, but Monday's announcement moved shares from a nearly 6% discount to a nearly 10% premium.

TVIX_^MSACWINTR_chart-3

Here's where this gets dangerous for people owning TVIX shares.

When TVIX hits its delisting date on July 12th, that premium, in theory, should go back down to zero. If the note was being closed outright, we'd be able to say definitively how it would be redeemed, but Credit Suisse is letting the note live on past its delisting date. That means it can still trade and possibly even at a premium or discount, but it likely would only trade on the pink sheets, an illiquid and expensive market.

At this point, I'd expect that premium on TVIX to shrink to zero by July 12th. That would mean anybody buying today at a 10% premium is paying $1.10 for every $1.00 of TVIX and investors could experience a quick 10% loss on just the premium collapse alone.

What Investors Should Know

I assume that most buyers of TVIX don't fully understand the inner workings of an ETN, such as TVIX, so I want to lay out the main takeaways from the ETN's delisting.

  • On July 12th, TVIX will be delisted. After that date, it would be very difficult and expensive to trade shares.
  • Buying today at a 10% premium to NAV is a bad idea, since that premium is likely going to zero by July 12th. That means a 10% loss on investment on top of whatever returns the underlying asset experiences.
  • TVIX is already a very volatile product. Expect it to be even more volatile up until July 12th.
  • Amateur and newbie investors should probably stay away from TVIX altogether. Even experienced investors are likely best served avoiding this product.

Proceed with caution!

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