Kind of interesting reading if you’re bored…have to enter an email and a name to download.
This caught my eye:
Liquidation (Unexpected Overnight Volatility Spike) If the VIX futures jump more than 80% in a day, the prospectus of the Short Volatility ETN (XIV) stipulates that Credit Suisse may terminate the instrument. While this has not happened yet while XIV has been around, it is a feasible scenario. If the XIV had been around for the October 19th, 1987 Black Monday market crash that saw the S&P 500 lose in excess of -20% in one day, the XIV would almost certainly have been bankrupt on that day. But even without bankruptcy, the XIV can experience dramatic one day losses. An example of that was during the British European Exit Referendum in June of 2016 (Brexit) when the S&P 500 dropped -5% overnight due to the unexpected result. The VIX spike was very big that day because market participants weren’t positioned correctly. As investors rushed to buy systemic market hedges (SPX put options), the VIX jumped 49.3% resulting in the biggest daily drop for the XIV ever of -26.8%. Historically, the VIX has had 4 days with spikes over 50% with the maximum spike of 64% ever recorded happening on February 27th, 2007 when there was massive selloff on the Shanghai exchange which spilled over into the US markets. Unimaginable events such as a sudden nuclear explosion in a major market center could cause an even bigger VIX spike thus putting an unmanaged short volatility strategy and the XIV at a significant liquidation risk.