Successful Launch for SVIX and UVIX

Today was the first launch of a VIX ETP in six years, at least by my count.  It appears to be worth the wait, as SVIX (Volatility Shares -1x Short VIX Futures ETF) had very robust volume, with 380,385 shares handily topping the 215,700 shares VXX traded in its debut back on January 30, 2009.  UVIX (Volatility Shares 2x Long VIX Futures ETF) just missed the VXX debut mark with 213,688 shares traded.

As an added bonus, I understand that options are scheduled to begin trading on both SVIX and UVIX tomorrow.

I previously opined, in UVIX and SVIX Join the VIX-Based ETP Landscape, on how I believe the superior product design and daily rebalancing methodology for SVIX and UVIX have the potential to make these the top two products in the VIX ETP space.  That said, it is still early days and when it comes to VIX ETPs, big surprises often lurk just around the corner.

[source(s):  Yahoo]

Further Reading:
UVIX and SVIX Join the VIX-Based ETP Landscape
First Day of Trading in VXX and VXZ a Success

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX and long SVIX at time of writing

UVIX and SVIX Join the VIX-Based ETP Landscape

Tomorrow will see first launch in the VIX ETP space since…well I’m not sure exactly, but I’m guessing the May 2016 launch of the now defunct VMIN and VMAX products.  Back in 2016, I tracked 27 different VIX ETPs and while there were several obvious leaders, the field was still in flux at that time.  In the intervening six years, it has been a war of attrition and that attrition has seen some spectacular departures and renovations, including the “Volmageddon” demise of XIV and the subsequent downward recalibration of leverage in issues such as UVXY and SVXY. 

This time around we have two promising ETFs that will be positioned in two critical spaces in the VIX ETP landscape, as the graphic below shows.  Not only are these products ETFs that avoid some of the potential problems associated with ETNs, including credit/counterparty risk, issuance/creation units risk, and acceleration/closure risk, but they make a valiant effort to address some of the daily rebalancing issues highlighted by the Volmageddon fiasco on February 5, 2018.

Specifically, the feature of these products that I find particularly compelling is the new methodology for daily rebalancing, which essentially uses time-weighted average prices in 5-second intervals covering the last 15 minutes of the standard trading session.  In this manner, the risks associated with liquidity of after-hours rebalancing or dramatic pre-close spikes are all but eliminated.  For more on the details of the end-of-day rebalancing methodology, I recommend Vance Harwood’s Why We Need the LONGVOL & SHORTVOL Indexes.

The two new products are:

UVIX (Volatility Shares 2x Long VIX Futures ETF) – a +2x product that is similar to the TVIX/TVIXF ETN as well as the UVXY ETF prior to its decrease in leverage from +2x to +1.5x on February 28, 2018 (profile, prospectus, more information via Vance Harwood)

SVIX (Volatility Shares -1x Short VIX Futures ETF) – a -1x product that is similar to the old XIV ETN as well as the SVXY ETF prior to its decrease in leverage from -1x to -0.5x on February 28, 2018 (profile, prospectus, more information via Vance Harwood)

With VXX currently in turmoil due to the ongoing suspension of its creation units, both UVIX and SVIX are launching at an opportune time to take market share.  I believe UVIX and SVIX benefit from a superior product design, an improved end-of-day rebalancing methodology, the preferred ETF product wrapper, and attractive leverage/inverse multipliers.  All they need is some liquidity and an active options market before they have the potential to supplant UVXY and VXX as the top products in the VIX ETP space.

In keeping with tradition (the graphic below has been published many times in various incarnations since 2010), I have plotted all of the VIX ETPs with respect to their target maturity (X-axis) and leverage (Y-axis).  [Note that TVIXF and ZIVF, currently traded in very low volumes on the pink sheets, have been omitted from this matrix.]

Now all we need is a product to fill the space left by the departure of ZIV (-1x, with a 5-month average maturity) and I would consider all the important VIX ETP white spaces to be restored.

[source(s):  VIX and More]

Further Reading:
Barclays Suspends Creation Units for VXX
Updating the Current VIX ETP Landscape
VIX ETPs Flash Some Green in 2016
Every Single VIX ETP (Long and Short) Lost Money in 2015
Performance of VIX ETPs During the Recent Debt Ceiling Crisis
Expanded Performance of Volatility-Hedged and Related ETPs
Performance of Volatility-Hedged ETPs
Performance of VIX ETP Hedges in Current Selloff
Slicing and Dicing all 31 Flavors of the VIX ETPs
Charting the Assets of the Volatility-Based ETPs
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
Who Is Trading TVIX?
All About UVXY

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX and UVXY at time of writing

 

VXX Premium to Indicative Value Falls Slightly to 26%

It has been two weeks since Barclays surprised volatility investors by announcing the suspension of new creation units in the popular iPath Series B S&P 500® VIX Short-Term Futures ETN (VXX).  Yesterday, a Barclays press release clarified some of what happened, noting that the firm had issued $15.2 billion more in VXX than had been authorized in an August 2019 $20.2 billion shelf registration.  Barclays has elected to conduct a rescission offer to eligible purchasers and is also dealing with regulatory authorities on this matter.

As for the future of VXX, Barclays was vague, but ended their press release with the following statement:

“Barclays intends to file a new automatic shelf registration statement with the SEC as soon as practicable.  Barclays remains committed to its structured products business in the United States.”

It is worth noting that VXX is a small part of the $12.7 billion structured products business in the United States that Barclays has pledged to continue with.  In that respect, the future of VXX is uncertain, but the intent to file a new automatic shelf registration “as soon as practicable” is certainly a favorable development.

VXX is down today with positive developments in the talks between Russia and Ukraine, but for the first time since March 16^th, the VXX premium relative to its intraday indicative value (IV) is down from the previous day, currently at 26.3%, down from yesterday’s 28.5% at the close.

The chart below captures the journey in VXX relative to indicative value (VXX.IV) going back to the Russian invasion of Ukraine.

As noted previously, the risk for shorts is that the short squeeze will continue and maybe even accelerate, perhaps in dramatic fashion, with the VXX premium to VXX.IV rising sharply.  On the other hand, the risk for longs is that Barclays will suddenly announce a new automatic shelf registration and the premium to IV will suddenly collapse to zero, as was the case with TVIX and Credit Suisse back in 2012.

While options in VXX are expensive (implied volatility is at 120), defined risk options trades are typically the best way to proceed when there is substantial “jump risk” (or overnight gap up or gap down risk) in both directions.

Finally – and for completeness sake – I should note that the OIL ETN that also had its creation units suspended in conjunction with VXX continues to behave relative to its indicative value, currently showing a premium of just 0.05 over indicative value.

[source(s):  TD Ameritrade]

Further Reading:
VXX Upside vs. Downside Risk with No New Creation Units
Barclays Suspends Creation Units for VXX
Attempt at TVIX Short Squeeze Fizzling Out
The Resurrection of TVIX
TVIX Premium to Indicative Value Creeping Back Up
TVIX Creation Units Return; What It Means for Investors
Is TVIX Now Just a More Docile UVXY?
Recent TVIX Volume and VIX Futures Volume
The Story of VIX ETPs Relative to their Intraday Indicative Values
The Ups and Downs of the New Premium in TVIX
Credit Suisse Suspends Creation Units in TVIX: What it Means
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
Who Is Trading TVIX?
Volatility Becomes Unhinged on Friday
TVIX Finally Getting Its Due As Day Trading Rocket Fuel
All About UVXY

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX at time of writing

Point Hedges ETP Performance During Invasion of Ukraine

On Friday in Flight-to-Safety ETP Performance During Invasion of Ukraine, I reviewed the performance of some of the traditional flight-to-safety ETPs (Treasuries, gold, currencies and volatility) that are often used to hedge an equity-centric portfolio. 

Evaluating the performance of these ETPs since Russia invaded Ukraine a little over a month ago, I found some rather lackluster numbers.  As a group, these products have not even broken even since the invasion of Ukraine.

This time around, I have elected to look at the performance of some less traditional ETPs, including some much more targeted products that I have referred to in the past as “point hedges.”  Specifically, I looked at areas where exports from Russia and Ukraine are a significant portion of the global export market and whose disruption could have a significant impact on the global balance of supply and demand.  As it turns out, these commodities were easy to identify and the price dislocations have generally dwarfed the appreciation one might have been able to realize with more traditional hedges.

These products include: 
USO: West Texas Intermediate Crude Oil (solid red line)
UNG: Natural Gas (dark purple line)
DBB: Base Metals (light green line)
DBA: Agriculture (violet line)
WEAT: Wheat (light blue line
CORN: Corn (black line)
ITA: Aerospace & Defense (medium blue/green line)

[Note that nickel (JJN) should be on this list, but in part due to some chaos and mismanagement at the London Metal Exchange, JJN prices jumped have had multiple spikes of more than 100% and dwarf the performance of other ETPs in this graphic.  Additionally, for the international crude oil market, Brent crude oil (BNO) is typically a better measure than USO, but since the  Russian invasion of Ukraine, the two ETPs have only differed in performance by about 2%.]

It is easy to play Monday morning quarterback and say that with hindsight it is easy to pick the winners, but anyone who studied Ukraine’s biggest contributions to the global export market could have deduced that a supply shortage in wheat and corn was likely and for Russia, natural gas, crude oil and nickel were three areas of high risk in terms of their strategic value to the West, with wheat and corn also part of the equation.  I threw in aerospace & defense as a general military hedge.

Unlike the inconsistent and largely negative performance of more traditional flight-to-safety ETPs since the Russian invasion, the point hedges above have all seen gains of at least 3% during this period – and if you remove aerospace & defense from the mix, all the gains are at least 6.8% or higher. 

This is not to say that more narrow point hedges will usually outperform the broader traditional hedges during periods of geopolitical turmoil, but rather to remind readers that instead of a more generic hedge, a targeted hedge or speculative trade often has the potential to deliver substantially greater returns, such as the median 13% returns from the group of ETPs above.

This also means, of course, that should there be progress in the talks between Russia and Ukraine that each of these point hedges is exposed to the potential of a significant decline in price.

[source(s):  StockCharts.com]

Further Reading:
Flight-to-Safety ETP Performance During Invasion of Ukraine
Safe Haven Options Shrinking?
Chart of the Week: Flight-to-Safety ETPs
Revisiting the Flight-to-Safety Trade
Chart of the Week: The Flight-to-Safety Trade
Why Not Point Hedges?
Cheating with Partial Hedges
Forces Acting on the VIX
A Conceptual Framework for Volatility Events

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): Net short VXX and long USO, DBB, DBA and ITA at time of writing

Flight-to-Safety ETP Performance During Invasion of Ukraine

Russia invaded Ukraine a little over a month ago, creating turmoil and panic in stocks and across a wide variety of asset classes and instruments. 

In the graphic below, I capture the performance of ETPs covering a variety of traditional flight-to-safety instruments that are used to de-risk or hedge an equity-centric portfolio.  These include: 
SHY: 1-3 Year Treasuries (solid red line)
GLD: Gold (dark purple line)
UUP: U.S. Dollar (light green line)
FXY: Japanese Yen (violet line)
FXF: Swiss Franc (light blue line)
VIXY: Short-Term VIX Futures (black line)

Note that normally I would use VXX, but the price distortions due to the suspension of new creation units makes VIXY a more accurate measure.

The graphic shows that none of the ETPs above turned in particularly strong performance.  Long volatility has been the best performer for the first two weeks, but is now down more than the S&P 500 Index, with a loss of over 12%.  The top performer for the entire period is gold, which has had a fairly steady if unremarkable return during this period.  The second-best performer is the dollar, which has seen a steady upside, but has consistently trailed gold.  Three ETPs have also generated losses, following a slight uptick the first few days.  The worst performer has been the Japanese yen and the other underperformers have been the Swiss Franc and 1-3 Year Treasuries.

All in all, these traditional or generic hedges have been a disappointment.  In my next post, I will look at some hedges that are better suited to the Russia-Ukraine situation and have delivered much better results.

[source(s):  StockCharts.com]

Further Reading:
Safe Haven Options Shrinking?
Chart of the Week: Flight-to-Safety ETPs
Revisiting the Flight-to-Safety Trade
Chart of the Week: The Flight-to-Safety Trade
Why Not Point Hedges?
Forces Acting on the VIX
A Conceptual Framework for Volatility Events

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): Net short VXX and long GLD and SHY at time of writing

VIX Teasing Seven Down Days in a Row, with Interesting Performance Implications

The VIX has been down six days in a row and is currently up a few pennies.

Assuming the VIX closes down again today (a fascinating thought in an of itself given the increasing Fed hawkishness as well as concerns about a Russian escalation in Ukraine), what might the string of declines portend for stocks going forward?  I pose this question because I think the historical data is telling, with 30 such instances of 7-day declines in the 33 years of VIX data going back to 1990.

What typically happens to stocks when the VIX falls seven days in a row?  Not surprisingly, if the VIX is continuing to fall, then stocks are almost always continuing to rise, to the point they becomes overbought.  Going forward, stocks have a tendency to see a one-day decline and some slight underperformance during the course of the next few days and up to a week.  At some point, whatever had been the fundamental driver of the decline in the VIX begins to regain control of the price movements in stocks and stocks move up sharply, with a high likelihood of outperforming the long-term average moves in stocks.

In the graphic below, I show the movements in the S&P 500 Index following a 7-day decline in the VIX relative to the average moves in the SPX during the same period.  You can see that the relative underperformance lasts five days, at which point the overperformance kicks in, with the maxim outperformance coming after 100 trading days.

[source(s):  Yahoo, TD Ameritrade, VIX and More]

Further Reading:
Top VIX Crushes in History
VIX Narrowly Misses New Consecutive Day Decline Record
VIX Sets New Record with Nine Up Days in a Row
Streaking

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): none

VXX Upside vs. Downside Risk with No New Creation Units

One week ago, Barclays announced the suspension of issuance of new creation units as well as sales from inventory for two of its ETNs: the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX); and the iPath Pure Beta Crude Oil ETN (OIL). 

The purpose of this post is to explain the risks for both long and short holders of VXX and to get a sense of how this story is likely to play out.

First of all, the announcement came before regular trading hours on March 14^th and during the entire session, VXX traded at a premium of up to 3.28 points relative to its intraday indicative value (IV), as captured in a graphic in Barclays Suspends Creation Units for VXX.  By the end of the day, VXX was trading at a 1.73 point premium to indicative value -- which is what VXX would be trading at if new creation units were still enabled.

It wasn’t until March 15^th that the fireworks begin.  That morning, VXX opened up another 2.08 points at 30.89, up 6.7% from the previous day’s close.  Right from the open there was some intense buying pressure that resulted in a short squeeze, with VXX briefly spiking as high as 41.65, up 44.6% from the previous day’s close.  That short squeeze was retraced over the course of the day and by the end of the session, VXX was down 0.11 on the day.  The action during the last five days has been relatively uneventful, though the volume in VXX has dropped approximately 90% from a pre-suspension average of about 50 million shares per day to less than 5 million today.  As of today’s close, VXX was at 25.44, some 3.93 points (15.4%) over indicative value.

The chart below captures the journey of VXX relative to indicative value (VXX.IV) in the seven days going back to the original announcement of the suspension of new creation units.  Note that for the last week, the VXX premium relative to VXX.IV has been in a range between 1.50 and 5.00, with that early short squeeze premium of 15.11 now firmly in the rear-view mirror.  At various times it appeared that traders had settled on 3.50 or 4.00 as an appropriate amount of premium for VXX in the absence of new creation units that could be used to arbitrage the price of VXX back down to VXX.IV.

The big questions are what to expect going forward and what are the risks to both long and short holders of VXX.  At the risk of stating the obvious, nobody outside of Barclays knows what will happen going forward, but Barclays described their move as a temporary suspension of creation units.  With VXX having assets of $729 million and a fee of 0.89% per year, Barclays has an incentive to find a solution for the creation units problem – and whatever is behind it – so that they can collect their $6.5 million annual fee from this product.  Credit Suisse was able to resolve a similar problem with the suspension TVIX new creation units in a month and a day back in 2012.  Barclays and VXX have been at this game longer than anyone else, with an initial launch of VXX back on January 30, 2009.  They have had 13 years to prepare for the present situation, which is likely a least partly related to hedging risks and costs associated with how Vladimir Putin proceeds with the invasion of Ukraine.  I expect they will find a solution to the new creation units problem in relatively short order, but I have no insight into whether this will be a matter of days or weeks.

Going forward, both longs and shorts have to expect that Barclays will bring VXX creation units back and when they do, the VXX premium relative to VXX.IV is likely to disappear almost instantly.  Truth be told, when Credit Suisse brought back creation units in TVIX back in 2012, it took two days for most of the indicative value premium to be wiped out, but those days were excruciating losses of 29.3% and 29.8% that left investors reeling and confused.  This time around the premium at risk of another new creation units air pocket is “only” 15.4% -- but there is very little to prevent this number from growing much larger.

This brings us to the other side of the equation.  How much higher can a short squeeze take VXX?  While 90% of the daily volume in VXX has evaporated in the past seven days, the current 5 million shares per day will likely have to shrink considerably more before a short squeeze has much in the way of potential staying power.  The DGAZ story from 2020 is a stark reminder that not only is it theoretically possible to see a spike of 12,000%, but such a spike has recently happened.  The problem for longs is that in waiting for a potential short squeeze, each day brings them one day closer to the seemingly inevitable announcement of a restoration of creation units and a 15.4% contraction in the price of VXX.  In addition to that potential 15.4% haircut, long holders should also keep in mind that VXX has lost an average of 56% per year going back to 2009 due to structural weaknesses such as contango, negative roll yield and daily compounding decay (which I have summarized in posts such as Four Key Drivers of the Price of TVIX), so time is not on the side of VXX longs.

In summary, the risk for shorts is the potential for a successful short squeeze along the lines of the DGAZ fiasco.  As volume in VXX decreases, which is likely to be the case until Barclays resolves the new creation units issue, the risk of a short squeeze rises.  On the other hand, the risk for longs is the resumption of new creation units almost immediately wiping out the premium over indicative value.  Both longs and shorts are likely to see their risks go up over time.  For VXX short, the assumption is that volume will continue to go down over time, increasing the risk of a short squeeze.  For VXX longs, the risk is that a solution to the creation units problem is just around the corner and could be announced at any time.  An announcement is unlikely to come out during the trading day, but overnight risk should be treated as considerably higher than intraday risk.

This situation is exactly the type of “jump risk” (or gap risk) that makes options an attractive way to structure a trade – either on the long or short side.  That said, note that implied volatility in VXX options is presently at an elevated level of 102, making outright purchases of VXX puts and calls expensive in the current environment.

I should note that VXX long holders may also be subject to acceleration risk, which means that this product is subject to early redemption or an “accelerated” maturity date, at which point the ETN would be redeemed at indicative value (VXX.IV) not at the current market price.  For more information on the risks associated with ETNs, FINRA has a good summary of the issues.

Last but not least, I should mention that the OIL ETN that had its creation units halted at the same time as VXX has seen very little in the way of premium over indicative value, with the biggest exception being a smaller squeeze/spike on the second day that coincided with the big spike in VXX.  Right now, the premium in OIL is a mere 0.03.  This does not mean that the Reddit wallstreetbets crowd will not suddenly pile into the OIL trade in an effort to squeeze the shorts in a lower volume name, but so far at least, the WSB crowd does not see OIL in the same way they saw the VXX or Opportunity of a Lifetime trade.

So, whether you are long or short VXX, understand the risks associated with your position and the time and volume factors also at work.  For those who insist on trading this name, consider structuring positions as defined-risk options trades.

In the graphic below, I show the premium of VXX to VXX.IV over the course of the last seven days, using 30-minute bars.

[source(s):  Yahoo, TD Ameritrade, VIX and More]

Further Reading:
Barclays Suspends Creation Units for VXX
Attempt at TVIX Short Squeeze Fizzling Out
The Resurrection of TVIX
TVIX Premium to Indicative Value Creeping Back Up
TVIX Creation Units Return; What It Means for Investors
Is TVIX Now Just a More Docile UVXY?
Recent TVIX Volume and VIX Futures Volume
The Story of VIX ETPs Relative to their Intraday Indicative Values
The Ups and Downs of the New Premium in TVIX
Credit Suisse Suspends Creation Units in TVIX: What it Means
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
TVIX Topples VXX as Highest Volume VIX ETP
Who Is Trading TVIX?
Volatility Becomes Unhinged on Friday
TVIX Finally Getting Its Due As Day Trading Rocket Fuel
TVIX Trades One Million Shares for First Time
All About UVXY

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX at time of writing

Barclays Suspends Creation Units for VXX

 Earlier today, Barclays announced the suspension of issuance of new creation units as well as sales from inventory for two of its ETNs: the iPath Series B S&P 500® VIX Short-Term Futures ETN (VXX); and the iPath Pure Beta Crude Oil ETN (OIL).  VXX is the premier VIX-based ETP and has been the most popular subject on this blog for the past 13 years.  It was the first VIX ETP to launch back on January 30, 2009 (along with VXZ) and remains the flagship product in the volatility space, averaging 70 million shares traded per day and regularly placing among the top five ETPs in terms of both share volume and options volume.

While the news from Barclays was a surprise, it was not unprecedented.  Credit Suisse suspended creation units in TVIX (a +2x version of VXX) twice: once in dramatic fashion in February 2012; and again in July 2020, when the product was delisted and moved to the pink sheets to trade under the TVIXF ticker.

The first time around, on February 21, 2012, there was not a VIX spike, per se, that triggered the event.  Instead, it was the general popularity of the product and the size of holdings in the TVIX note (ETNs are an unsecured debt note) that concerned the bank.  Credit Suisse acknowledged that the TVIX note violated the bank’s risk management rules related to the “internal limits on the size of the ETNs” and thus triggered the suspension of creation units.

The second time around, on July 12, 2020, the record volatility spike associated with the onset of the pandemic caused the size of the TVIX note to be roughly half of the size of the bank.  As a result, Credit Suisse concluded that the risk of continuing with this product was too high, so they decided to exit the ETN business, stop issuing new creation units and delist nine ETNs.

In both 2012 and 2020, the absence of new creation units led to a supply shortage and a large premium in the market price relative to the intraday indicative value (IV).  In 2012, new creation units were halted for a month and a day, with the price of TVIX rising to an 89% premium to TVIX.IV at one point.  When TVIX creation units were restored, TVIX fell 60% in three days and soon was trading within 1% of indicative value.  In 2020, the cessation of new creation units was final and irreversible, so TVIXF has now been trading on the pink sheets for 21 months without any new creation units.  Initially, there was almost no premium in TVIXF to TVIX.IV, but the Reddit r/wallstreetbets crowd eventually latched onto the potential for a short squeeze in TVIX in early February 2021 and spiked the price of TVIXF from parity to a 43% premium in two days.  Since the initial targeting by r/wallstreetbets, the premium in TVIXF to TVIX.IV has averaged about 72% and has been as high as 160% at one point.

An even more famous and noteworthy example of investors targeting a product with no creation unit capabilities for a short squeeze is the plight of the VelocityShares Daily 3x Inverse Natural Gas ETN (DGAZF), which spiked from 400 to 24,000 in a week in August 2020.  The VelocityShares Daily 3x Inverse Natural Gas ETN was traded under the ticker DGAZ when it delisted, with no new creation units along with TVIX on July 12, 2020.  The combination of longs targeting a short squeeze, limited liquidity in the OTC pink sheets, no new creation units and 3x leverage made for a historic spike of 12,000% in one week.  While such a scenario is unlikely to unfold in VXX, it is important to understand the history and the potential for outsized short squeezes when there are no creation units available to arbitrage away the difference between the heavily shorted underlying and its indicative value.

There are many other examples of ETPs that have had their creation units suspended, with resultant price anomalies.  Deutsche Bank did it with a variety of commodities ETNs in 2011 and 2012.  PowerShares also suspended creation units in the popular PowerShares DB Oil Fund (DBO) in 2015, with yet another large price spike.

While buyer beware is a good mantra to keep in mind when purchasing ETFs or particularly ETNs, it is even more important for short sellers to understand the risks of holding one or more of these products short when creation units are suspended and particularly when the products are delisted, with trading moving to the OTC pink sheets.

As for VXX, the reasons for the halt in creation units are not exactly clear.  Barclays says in their press release:

“This suspension is being imposed because Barclays does not currently have sufficient issuance capacity to support further sales from inventory and any further issuances of the ETNs. These actions are not the result of the crisis in Ukraine or any issue with the market dynamics in the underlying index components. Barclays expects to reopen sales and issuances of the ETNs as soon as it can accommodate additional capacity for future issuances.”

The underlying cause of the issuance capacity issue may be a number of factors, including the cost of hedging the position, exchange position limits or other factors.  Without knowing the underlying cause, it is difficult to predict when new creation units will be restored.  That said, as VXX appreciates in price, the size of the problem Barclays needs to tackle will continue to rise, which may further complicate the resolution process.

Of course, when new creation units are restored, one can expect that the price of VXX will almost immediately fall to that of VXX.IV.  Investors, therefore, need to understand the risks associated with long positions going forward and not find themselves in an air pocket like TVIX longs did back in March 2012.  For this reason, anyone who is insistent upon holding a long or short position in VXX should consider constructing a defined-risk position using options.  Alternatively, VIXY is an ETP issued by ProShares that holds a basket of VIX futures rather than an unsecured bank note with a promise to return the same performance as that basket of VIX futures.

It should go without saying that everything here I addressed relative to VXX is true for OIL as well and with all the turmoil in the oil markets related to events in Ukraine and Russia, there is already the potential for huge moves in the underlying.

I covered the TVIX creation units issue in considerable detail in 2012 and the links below probably provide the most comprehensive review of this matter anywhere on the internet.  I have also provided links to a number of tangential issues related to VIX ETPs and pricing anomalies.

In the graphic below, I show the divergence between VXX and VXX.IV during today’s regular trading hours (Pacific Time).  I find it interesting that it took more than three hours after the initial press release before VXX began to uncouple from VXX.IV and spike higher, ultimately reaching a 12% premium before the divergence began to narrow during the last half hour of trading.

Long-term, I still think VXX is likely to remain the premier VIX-based ETP, but Barclays has some work to do to get the creation units back and the product trading with a normal supply-demand balance.  Until then, keep a close eye on the varying premium of VXX and VXX.IV, while evaluating alternatives such as VIXY and UVXY.

[source(s):  Yahoo, TD Ameritrade, VIX and More]

Further Reading:

Attempt at TVIX Short Squeeze Fizzling Out
The Resurrection of TVIX
TVIX Premium to Indicative Value Creeping Back Up
TVIX Creation Units Return; What It Means for Investors
Is TVIX Now Just a More Docile UVXY?
Recent TVIX Volume and VIX Futures Volume
The Story of VIX ETPs Relative to their Intraday Indicative Values
The Ups and Downs of the New Premium in TVIX
Credit Suisse Suspends Creation Units in TVIX: What it Means
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
TVIX Topples VXX as Highest Volume VIX ETP
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Volatility Becomes Unhinged on Friday
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Disclosure(s): long VXX at time of writing