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TVIX Plunge Has Traders Scratching Heads

The mystery over the plunging TVIX, a volatility product that lost 30 percent Thursday and is plunging again Friday, has traders in a tizzy, with an after-hours announcement only jumbling the puzzle.

NYSE Trader
Photo: Oliver Quillia for CNBC.com
NYSE Trader

Credit Suisse, which issues the exchange-traded note that is supposed to double the moves of the CBOE Volatility Index , said last night that it will reopen issuance of the Velocity Shares Daily 2X VIX Short-Term ETN , a month after it had suspended issuance because of internal size limits.

In doing so, Credit Suisse warned that the move "could reduce or remove any premium" on the note and cause "significant losses in the event the investor sells such ETNs at a time when the premium is no longer present in the market place or the ETNs are accelerated."

In short, trading could get a little crazy, and potential buyers should be aware that the note might not move in a predictable manner.

ETNs are similar to their exchange-traded-fund cousins but actually are debt securities similar to bonds. Returns are based both on trading values of the underlying index as well as credit rating of the issuer. As such, they don't always completely follow the indexes they purport to track.

What has some traders perplexed is that the Credit Suisse announcement on the TVIX did not come until last night at 7:30, yet the note lost 29 percent in the day's trading. The question is why traders would have been dumping the TVIX even as the underlying VIX lost just 3 percent yesterday, and whether someone was front-running the Credit Suisse announcement that came a full three and a half hours after the close of trading.

One theory, floated by Brendan Conway at Barron's, is that Credit Suisse's move actually came in response to the selloff. That would make sense in that the reason why the shares were suspended in the first place was because the note was overowned.

Credit Suisse officials declined comment beyond the statement released Thursday.

With the market slumping lower on the day, it was odd that the the VIX products lost anything yesterday as they usually move in the opposite direction as stocks.

Also, the damage is far from over for the TVIX. The note was down another 15 percent in early trading Friday.

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