"I'm worried...Can SVXY open at $0 if VIX doubles overnight?"
This seems to come up every 3 months or so.
Listen folks, the vix futures have never and will never double overnight. And that would be both front and second month..
Look back at my old posts where i showed even during the most scary depths of 2008-2009 it wasn't even close. Not even close. it was like 30% or 40% at most. I don't recall, but just the same, NOT EVEN CLOSE.
I fully expect, yes i said 'expect', that people will lose a ton of money in this thing one day, but it's not going to be an over-night situation.
Never is a very strong word. Probable no, possible yes. With the VIX at 12, there are certain "black swan" events that could cause the VIX to more than double along with the first and second month futures. It is risk albeit a small one. Using XIV as a proxy, XIV lost about 60% of its value in a course of a month from July 2011 to August 2011. That is the most likely outcome in a sudden rise of the VIX.
I don't think it works that way. I think it is more like if the VIX doubles then SVXY will be worth one half. In other words it is multiplicative, not additive. You can go look at past price movements. In feb of 2014 the VIX went up by 60% and SVXY went down about 25%, not 60%. I don't claim to be an expert. But I can see from the chart that in the past it has never done what you are concerned about. I think it is safe to hold it long term but one cannot argue with the prudence of taking some off the table from time to time. My concern is what would happen in a recession and how long would it take to recover. If economic indicators start to look prerecession then it is time to take an investment vacation. Under those conditions the VIX can go up 3 to 4 times with a few fake peaks on the way up. You simply cannot know for sure when it is done rising. But in normal times I would not worry about that. Keep in mind that the VIX is at record lows and as a result SVXY has been doing abnormally well. Don't let that cause you to let your guard down. If the market gets spooked that will come to an end. You should have that as an expectation because it is going to happen and it won't be pretty. I use trailing stops. Where you set them to is a personal decision. The VIX has never doubled over night that I have seen. Not even close.
If you look at historical numbers, a recession seems likely in the next one or two years. This is a very long time to go without a recession and the recovery is very weak. I would love to add to XIV in the 30s or even 20s but I really doubt it.
The wild card is backwardation like we saw in 2011. That would change the equation a lot. Generally VXX and SVXY are mirror images in the short term and VXX increases half as much in percentage terms as the VIX. Figure if VIX went from 12 to 20 right now, VXX would rise 35% and XIV/SVXY would drop 35%.
There are a few posters here who plan to hold this for the long term, so it will be interesting to see what they have to say. On that note, I will take the other side of that trade as it were.
Long term this should work, but we don't really know. What happens if the VIX enters in to a period of chop where things become volatile? In that case the product itself could lose value based on the roll of the contracts. Contracts sold short at 10 that have to be covered at 40 results in a real loss. If similar happened enough times, theoretically this could go to zero.
I am not saying this is what I expect, but just that it is a possibility. "When Genius Failed" is a great book of a similar no lose trade exploited and levered by Long Term Capital Management. We all know how that ended.
My personal preference with something like this is to limit risk with options. Especially now that this product seems like such a work horse.