That chart shows us that contango is resilient, and sure, it has its bumps, but it doesn’t get broken for long periods of time — nor should it… unless an exogenous factor comes in. And that happened.
WHEN A LINE BECOMES THE FOCUS
A little detail in the prospectus of XIV is that, hypothetically, should it lose 80% of its value from the close, it would cause a “acceleration event.” That means that if the XIV sunk to 20% of its value, it could go to zero and the ETN would go away (and start over later). The creator, Credit Suisse, would do this to protect from further losses to itself.
Now, obviously, this had never happened to XIV before, but it’s only a decade old. When scientists back-tested XIV all the way back to the 1987 crash and including the 9/11 terror attacks, they noted that even then, XIV would not have suffered a 80% decline in a day. But we have never seen such a market with so many naked short vol sellers as we have today.
As a barometer, even as crazed as Monday was, here is how XIV closed: