New Volatility Products

There a lot of new volatility products which I want to review.

One of my favorite one is XIV. Bill Luby has a good discussion going on Vix and More.

The biggest risks for the XIV is a catastrophic event which creates a spike in VIX futures. In August 2011 we had several days when VIX jumped 20-50% and VXX moved up 15-20%. So XIV lost 15-20% in those days.

During the past 2 months XIV was a terrible investment (it lost 66% from the peak). Is this normal? Where there other time periods when this would have happened?
I went back and tried to recreate XIV using Juan Ramon Velasco Barros' VXX data since 2004 from his website.

I came up with a few conclusions:
- in August the VIX had a record jump of 103% in a week (unprecedented in the past 20 years)
- the worst drawdown of more than 80% in XIV would have been during 2007-2008, but it wasn't in one day
- in the 2 months after Lehman went under the XIV would have lost 75%
- the worst one day move was -20%

The chance of a 100% loss in a day seems very small, but the drawdown during a few weeks/months could be significant (70-80%).

So why would anybody invest in something like this? I will write about the upside of XIV next time.