Friday, January 28, 2011

TVIX Finally Getting Its Due as Day Trading Rocket Fuel

Launched at the end of November 2010, I am surprised it has taken so long for TVIX to become a popular short-term trading vehicle. I predicted in the middle of December that TVIX “will hit a tipping point and become the darling of day traders,” but in the absence of meaningful volatility during the last few months, it has sometimes been difficult to see the potential of TVIX.

With today’s sell off in stocks, however, TVIX was up as much as 18.5% at one point and traded a record 120,000 shares in the first half of today’s session, easily eclipsing its prior volume mark.

Shortly after Direxion launched the first triple ETFs in November 2008, I came out with what sounded like an outrageous claim at the time: Prediction: Direxion Triple ETFs Will Revolutionize Day Trading. It took awhile, but eventually these products became the preferred vehicles for many short-term traders. Their popularity was undercut somewhat when margin requirements were raised to match the leverage built into these trades. With TVIX, which is essentially a +2x version of VXX, VIXY and VIIX, I expect that the tipping point has arrived today. With new liquidity, short-term traders now have a product where 10% daily moves will be relatively common and margin issues should be minimal.

Of course, as a buy and hold vehicle, TVIX will present several significant obstacles, including negative roll yield due to VIX futures term structure/contango issues, as well as the loss in value associated with volatility + compounding that plague leveraged ETFs.

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Disclosure(s): short VXX at time of writing

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