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Credit Suisse Roiled by Volatility Bet

09 February 2018

The Average True Range is an investor tool used to measure stock volatility.

Cboe Global Markets (CBOE) stock lost more than a tenth of its value Tuesday and smashed through its 50-day moving average line as trading was halted on several inverted volatility products, raising concerns about trading volume at its Chicago Board Options Exchange. The CBOE has a video explaining some of Monday's VIX trading activity. One of the most popular time frames using RSI is the 14-day.

Some market participants blamed Monday's late-day stocks meltdown and the after-hours futures rollercoaster on the massive unwinding of short positions in volatility-linked ETPs. Conducting thorough fundamental research on stocks even after they have broken out may help the investor understand the reason behind the move, and whether it is likely to continue or if it is just a temporary spike.

The huge drop in an obscure security appears to have raised jitters from financial investors for its parallels to the beginnings of the financial crisis of 2008/09, the first signs of which were banks such as HSBC issuing profit warnings on losses from US mortgage lending.

Both the VIX and the VSTOXX have drifted lower since early 2016, staying at depressed levels below their 20-year average for almost two years - until Monday's slide in US stocks.

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The was an inverse bet on volatility, in this case, a basket of volatility futures (the two front-month VIX futures contracts).

If you're afraid of losing money but you're heavily weighted to stocks, then no matter what happens, you'll panic anytime the market falls. As of the date hereof, Credit Suisse will no longer issue new units of XIV ETNs. It said its losses related to the note would not materially impact the bank's finances but didn't quantify them. As far back as July 2017, he said that the shorting of volatility reminded him of the conditions leading up to the 1987 stock market crash, and repeated that multiple times through the end of the year.

Investors said the proliferation of short-term traders, some using computers to trigger trading decisions, had also exacerbated the price swings of the past few days.

At the time of writing, S&P 500 Dynamic VIX ETN Ipath (XVZ) has a 14-day Commodity Channel Index (CCI) of -180.02.

The repercussions have been severe for some funds.

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One day after the Cboe Volatility Index (VIX) saw its largest one-day increase ever―115.6%―Credit Suisse announced it would be shuttering its popular inverse VIX ETN.

Cerebellum GP LLC purchased a new stake in iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) in the 4th quarter, according to its most recent filing with the Securities & Exchange Commission.

The problems these tracker funds are facing should not cause permanent damage to the broader market, investors said, as the total assets under management pales in comparison to the broader options market and equity market overall.

Two investment vehicles tied to United States share market volatility collapsed after the S&P500 closed earlier this morning, and it could have significant implications when markets reopen later tonight.

This was the first serious test for these ETFs, most of which were launched after the global financial crisis.

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Credit Suisse Roiled by Volatility Bet