Paul Tudor Jones is legendary among traders for a lot of reasons, but the foundation of his myth was set in 1987, when he raked in a massive profit by effectively predicting Black Monday, the largest ever one-day drop in the stock market.
And he did it by shorting the market.
Stocks were riding high in early ’87, but Tudor Jones wasn’t sold. He saw equities as greatly overvalued, digging deep into earnings reports and other data in an attempt to determine the true value of the market and where it should be trading. As a result, he decided that stocks were at least 20% overvalued that year and he began trading against the market aggressively.
That October, on Black Monday, the market plunged 22% in one day, proving Tudor Jones right and delivering one of the greatest trades in Wall Street history.
Obviously, replicating this type of trade is not easy and calls for some serious gumption on the part of the trader. But shorting the overall market can be both a lucrative trade and a smart risk management strategy when carefully executed.
This is where the VIX comes in.
VIX is the popular name for the Chicago Board Options Exchange (CBOE) Volatility Index, “a real-time market index that represents the market's expectation of 30-day forward-looking volatility.”
It’s the stock market’s “fear index.”
Based on S&P 500 index options, the VIX is a measure of market risk and investor sentiment tied to how many investors are shorting the market. And it forms the basis of TVIX.
What is TVIX?
At the most basic level, TVIX is an exchange traded note (ETN) offered by VelocityShares, specifically the Daily 2X VIX Short-Term ETN. It is an ETN that tracks the S&P 500 VIX Short-Term Futures Index but does it with 200% leverage on the volatility moves, making it popular with those who want to bet against the market on a short-term basis.
First, a quick note about ETNs and what differentiates them from ETFs. The best way to think about it is like the difference between stocks and bonds – ETFs, like stocks, represent a share of an underlying asset whereas ETNs are structures products like bonds that are not secured with any specific asset. That’s why leveraged funds are typically ETNs and not ETFs.
VelocityShares’ VIX-related ETNs are designed “to provide sophisticated institutional investors with exchange traded instruments for implementing views on volatility and hedging risks,” and are often used to avoid long-tail negative market swings in partnership with VIX-related ETFs, futures, options, swaps and other vehicles. Per the company, TVIX “seeks returns that are 2x the returns of the S&P 500 VIX Short-Term Futures Index ER for a single day.”
In short: leveraged ETNs like TVIX aren’t for everyday retail traders, but experienced investors who are building complicated protection strategies.
Why Short the Market?
A short trade vehicle like TVIX can benefit traders in two different ways.
On the one hand, there’s the potential for a Tudor Jones-style market short trade, finding profit in a big market drop. But the more common use of this sort of trade is for protection from a downside “black swan” event, allowing traders to hedge their positions in a volatile market.
Think about it. When the market plunges like it did on Black Monday (and even a few times already in 2020), a portfolio that’s only focused on positive growth with get slammed, falling right alongside the market. But, by holding a leveraged short ETN like TVIX, a trader can offset some of those losses to pad the fall and maintain some of their positions. Those holdings won’t benefit on the way up but can be a lifesaver on the way down, with the leverage helping to expand that advantage.
How Magnifi Can Help TVIX Traders
But TVIX is only one of the options for traders looking to build this sort of portfolio. And this is where Magnifi can help.
By offering a new and better way of discovering ETFs and mutual funds, Magnifi makes it quick and easy to find the right funds for your specific investment goals and needs. By leveraging the power of semantic search and advanced digital technology, it offers immediate and detailed access to the world of ETFs and mutual funds, with in-depth information on each asset.
Learn more and get started at Magnifi.com.
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