Far from being a one-hit wonder, I predicted just two weeks after it was launched (toward the end of 2010) that “TVIX will hit a tipping point and become the darling of day traders.” If anything, I am surprised that it took so long for TVIX to attract this much attention.
With all the new attention, however, comes quite a few new investors who do not fully understand what factors are driving the price of TVIX. I have addressed some of these points over the course of the last week or so, but here are the four key drivers of the price of TVIX that every investor should understand:
If you combine all four factors you have a product that is ideal for day trading, as it can skirt the contango and volatility compounding issues in a compressed time frame. For buy and hold investors, however, contango plus volatility compounding is a recipe for big losses.
The graphic below lays out the gamble in visual terms. For the most part, those who are long TVIX for extended periods will be subject to losses that are substantial and persistent, but there is always the chance of catching a brief move in which all four forces are aligned with the bulls and TVIX moves sharply higher, as was the case in August and September 2011. Unfortunately, this is rarely the case.
The bottom line is that if you are already invested in TVIX or are considering an investment in TVIX and do not fully understand each of the four issues above and their impact on investments in TVIX over the short-term and long-term time horizon, then it is probably time to stop trading and increase your knowledge base (hence the links below) before you learn some expensive lessons.
Disclosure(s): short TVIX at time of writing