XIV (inverse VIX) is down 20% since its peak in early July, with most of that loss coming in just the last two days. For most assets that would be a lot, but for VIX ETPs, it’s business as usual – the inherent cost of chasing big returns. To illustrate, the graph below shows XIV since 03/2004. I’ve shaded red those periods where losses exceeded 20% from a recent peak. I’m focusing on XIV because most directional ETP traders (like us) spend most days short the VIX either via inverse ETPs like XIV, or by shorting ETPs like VXX.
These 20% losses have occurred about 2.3 times per year.
That doesn’t mean as traders that we can’t try our best to sidestep the bad times (or even rotate to long VIX products like VXX and profit from them), but it does mean that we should be mentally prepared for, and unsurprised by, moves like this one.
Related Post: Visualizing Gains and Losses in VIX ETPs
Volatility Made Simple
Wonk note: data prior to the launch of XIV has been simulated. We’re able to do this accurately using a combination of the indices and the futures data on which XIV is based. Read more about simulating data for VIX ETPs.