Saturday, February 25, 2012

TVIX - Premium and Extreme GAZ Bubble Example

As compared on the 5min chart, TVIX and UVXY were trading in synchronized fashion until the close of trading on February 21st.  After the close on that day, Credit Suisse announced a suspension of further TVIX issuances:

This resulted in TVIX trading at a premium starting on February 22nd.  In another recent example, GAZ, a Natural Gas futures ETN traded at an extreme premium.

"Premiums occur when a fund is no longer able to create the shares needed to satisfy demand, ultimately capping the fund's growth. In essence, GAZ has begun to trade like a closed-end fund."

An extreme bubble formed in GAZ.  TVIX is a much larger ETN than GAZ.  There are some similarities in that both GAZ and TVIX issuances were suspended after a long downtrend on the Daily charts. 

It is unclear what will happen to the current premium in TVIX going forward.  Ultimately, as long as issuances are suspended, it depends on the balance of supply and demand characteristics which are influenced by various factors including market conditions, behaviour of the VIX and VIX futures etc...  Another consideration is whether an accumulation of short interest in GAZ resulted in a subsequent short squeeze.

In any case, an understanding of the facts, and a prudent approach is required considering the uncertainties involved going forward. 

5min Chart

An extreme example of an imbalance can be seen in the recent GAZ bubble.

Daily Chart


  1. SC, I wonder whether your cycle methods are subject to inversion? I've noticed that some cycle techniques can correctly identify important dates, but an expected top sometimes turns out to be a bottom or vice versa. I don't know enough about your approach to know whether this may be possible.

    I ask because Feb 27th looks a lot more likely to be a high than a low. I have a cycle also showing a sharp rally from Feb 27th into early March (around March 7th), though I suspect this may have inverted.


  2. SC, do you think it is time to sell TVIX then buy back UVXY to take the advantage of premium.


    1. I'm debating what is the best approach, but have made no decisions yet. The premium could contract or expand under different situations. It has only been 3 trading days so far, and that makes it difficult to predict the behaviour. The premium did contract on Friday as TVIX was rising, but without seeing some more action, it is hard to say if this will be the case going forward.

      In the case of GAZ, the premium expanded rapidly, but there is no way to say if this will happen for TVIX.

      For all ETNs, it is important to review whether issuance is suspended, and if it is trading at a premium or discount before purchasing. Also it is important to review the current status while holding ETNs.

  3. The equal time cycles that I use sometimes are subject to inversion. They can be highs or lows.

    In this case I am using my cycle analysis method which is a probability distribution method. The aim is to indicate if the behaviour on a given day looks positive or negative. In this case the 27th looks weak. It doesn't necessarily have to be a low though. I've seen cases where the high was first thing in the morning, and then the market sold off during the day. So in that case the day was negative, and it was the start of a decline.

    The first couple days of March at least look weak also. Let me look closer at around the 7th of March, and see how that looks around that date.

  4. One other point to make is that some may be tempted to short TVIX seeking to profit from an eventual contraction in the premium. This could be dangerous if TVIX bubbled the same as GAZ so make sure to do thorough due diligence.

    I wonder if shorts were attracted by the initial premium in GAZ, and this may have contributed to the GAZ bubble.

  5. UH OH..............

    Went over the charts. More than likely we turn down in the next two days (that may be after one more pop to 1375ish or right from here)

    BUT.................There is an outside chance of a ripper to about 1390ish. Normally I would give this about a 25-30% chance but being that I have no sell signal I have to raise it to about 45%.

    One thing I give very little chances of is 1328 on Monday.


  7. Tomorrow is the big day for the drop. Question is whether it drops to 1330. At this point 1290 looks like a pipe dream.