Volatility forces WisdomTree triple inverse leveraged oil ETP to close

Apr 22nd, 2020 | By | Category: Commodities

WisdomTree has announced that trading in the WisdomTree WTI Crude Oil 3x Daily Short ETP has been suspended and that the product is to be compulsorily redeemed.

Overnight volatility forces WisdomTree triple leveraged oil ETP to close

Oil prices have been plagued by high volatility recently amid an unparalleled supply glut.

The forced redemption follows significant volatility during which the underlying reference index experienced a “Severe Overnight Gap Event”.

The LSE (3OIS LN / 3SOI LN), Xetra (O1LS GR), and Borsa Italiana (3OIS IM)-listed ETP provides triple leveraged inverse exposure to the NASDAQ Commodity Crude Oil ER Index.

The index measures the performance of the active front-month West Texas Intermediate (WTI) oil futures contract.

Right now, this is the June contract.

The ETP gains exposure to the index through the use of a swap agreement, reset daily, with counterparty BNP Paribas.

The critical move in the price of the June contract occurred between 21st and 22nd April 2020.

When trading in the ETP closed at 4.30pm (LSE) on 21 April, the contract was priced at $11.57. Between midnight and 1am London time on 22nd April, the price of the future reached a value of approximately $13.88, indicated by the upper red line in the chart below. This value presents a 20% upwards move versus the future’s last closing price on 21st April, indicated by the lower red line.

Given that the ETP provides an exposure that multiplies the return of the underlying index from its previous close by minus three, and the underlying index tracks the future, the theoretical value of the ETP at this point was approximately 40% of its previous closing price on 21st April. This would equate to an overnight fall of 60% in the value of the ETP from its previous close.

By breaching the 20% index threshold, a legal provision was triggered which allowed the swap provider to terminate the swap. The purpose of this provision is to allow the termination of the ETP before its value is completely wiped out.

The value of the ETP was suspended at approximately $8.19 per share with WisdomTree noting that payments are expected to be made to investors around 28 April.

WisdomTree -3x Oil ETP termination

Back in March, a similar event, albeit reversed (i.e. caused by a fall in oil prices), occurred with the WisdomTree WTI Crude Oil 3x Daily Leveraged ETP and WisdomTree Brent Crude Oil 3x Daily Leveraged ETP, with the issuer announcing that both products would be compulsorily redeemed.

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