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VelocityShares Daily 2x VIX Sho (TVIX) Message Board

  • bustin_ur_chops bustin_ur_chops Mar 31, 2013 8:44 PM Flag

    TVIX math magic

    futures expiry Tues April 16. -- 12 trading days

    closing prices Friday

    VIX spot. 12.70
    Apr future. 14.19, 10% spot to front contango
    May future. 15.56

    FACT: when futures expire, front future MUST converge with spot

    FACT: futures curve is in CONTANGO, ie spot is lower than future

    FACT: if the futures curve remains upward sloping, every day in theory. will sell 1/12 of the current April contracts and replace them with May futures which are currently 9.65% more expensive. This is called NEGATIVE ROLL YIELD, the devastating decay that occurs in a futures market in CONTANGO. TVIX is 2x leverage of VXX and will experience twice the decay.

    go to VIXCENTRAL. dotcom. Stare at the futures curve until it burns an image onto your retina!

    THIS IS WHAT HAPPENS TO TVIX IN A FLAT MKT, ABSENT VOLATILTY:

    IF the volatility remains unchanged for the next two weeks until expiry, one of three things will happen that Tuesday p.m. (if VIX has been hovering ~ 12.7 and Apr future ~ 14)

    The April future can drop to converge to spot, and TVIX will feel the full brunt of today's 10% contango -- a full 20% drop in TVIX in 2 weeks.

    Or VIX can surge up to meet the Apr future in which case TVIX 'longs' will post frantically "TVIX BROKEN, VIX UP 11% and TVIX didn't budge%!%!%!"

    Or they can meet somewhere in between and TVIX will fall.

    Other scenarios:

    VIX DROPS BELOW 12.7 at expiry: TVIX closes below 2.8 in just 2 weeks

    VIX CLOSES ABOVE 12.7 at expiry: VIX can absorb an increase 13.6 - 14.0 (based on today's curve) before TVIX will rise above 3.5.

    Just my humble opinion,

    Bustin, consulting with RollYield the ferret, MBA

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