VIX ETPs – What Can Go Wrong?

For many years, I’ve had a tagline at the bottom of my email: “In volatility there is opportunity!”  The tagline is a reminder that when things look darkest in the financial markets, this is often an area of maximum opportunity.

On the other hand, the VIX ETPs have quite a few quirks and as a result of these quirks and their high volatility, there are considerable risks for both longs and shorts.  How much risk?  Quite a lot.  Consider that on a split-adjusted basis, the +2x long TVIX launched at 2.66 billion (not a typo!) and trades anywhere from less than a dollar (the TVIX.IV indicative value) to 2.45 TVIXF (on the pink sheets), depending upon how you wish to measure the magnitude of the bloodbath.  On the other side of the coin, the -1x short XIV fell 93% on one day back in the February 2018 volatility spike now known as Volmageddon that resulted in an acceleration event (triggered when the price of XIV fell by more than 80% on a single day) and the closing of XIV.

From the 30,000-foot perspective, the big risk in being short volatility is that a big one-day VIX spike can theoretically destroy the value of your entire position.  On the other hand, the big risk in being long volatility is that you die a death by a thousand cuts and suffer the same 85% per year compound annual decline experienced by a product like TVIX.

There are many individual risk factors that are responsible for the total risk of an individual VIX ETP.  I have spelled out a number of these in the past, spending considerable time on contango and negative roll yield.  Way back in May 2009, I summarized some of my thinking in the likes of VXX Calculations, VIX Futures and Time Decay and elaborated on some of those themes in October 2009 in Why VXX Is Not a Good Short-Term or Long-Term Play.  I also addressed the subject of how reverse splits are the only thing keeping some of these products from falling to zero in Will TVIX Go to Zero? in February 2012.  In that post, I highlighted this gem from the TVIX prospectus:

“The long term expected value of your ETNs is zero. If you hold your ETNs as a long-term investment, it is likely that you will lose all or a substantial portion of your investment.”

One of my better summaries of the factors putting downward pressure on the price of TVIX came in Four Key Drivers of the Price of TVIX in 2012.  Here is the meat of that post:

1.  Volatility – this seems obvious, but in the short-term, the movements of the front month and second month VIX futures explain almost all of the change in the price of TVIX. For day traders, TVIX becomes essentially a substitute for trading the VIX futures and with the exception of leverage, the other factors below are inconsequential.

2.  Leverage – another obvious factor, the 2x leverage in TVIX means that on average it moves about as quickly up and down in percentage terms as the VIX does and twice as quickly as a basket of front month and second month VIX futures. In the short-term, leverage means mostly that the moves in the underlying are exaggerated; in the long-term, leverage enhances volatility compounding and has a negative impact on price.

3.  Contango – thanks to the emergence of VIX ETPs as the cornerstone of volatility as an asset class, issues related to the VIX futures term structure in general and contango and negative roll yield in particular have become among the most frequently discussed issues in this space. Simply stated, the front month and second months of VIX futures are in contango more than 75% of the time, with the result being a monthly drag on TVIX’s price that exceeds the current annual yield on the 30-Year U.S. Treasury bond.

4.  Volatility compounding – the more volatility a leveraged security exhibits, the more that volatility will have a negative impact on performance over an extended period. The issue is the same as someone who owns a dress shop and marks the dress down 50% and then up 50% or reverses the chronology and marks the dress up 50% and then down 50%. Either way, the value of that dress declines by 25%. The same is true for leveraged ETPs and the degree of the price decay is a direct function of volatility.

While the number of VIX ETNs is dwindling, ETNs have their own set of issues, as these are debt securities – essentially a promise to pay the value of the underlying index – rather than a portfolio of VIX futures, as is the case with VIX ETFs.  We have seen issues related to VIX ETNs come to the fore with TVIX in 2012 when Credit Suisse suspended new creation units in TVIX only to resume new creation units a little more than a month later – roiling the supply and demand dynamics as well as the TVIX market price in both directions.  Last month something similar happened with Barclays and VXX when Barclays suspended new creation units in this product.  There are issues related to ETNs that are unique to these types of securities and include credit risk, counterparty risk, price risk relative to indicative value, etc.  The SEC summarizes some of these ETN-specific risks in this investor bulletin.

If you want to better understand some of the risk factors involved in these products, I highly recommend you review the prospectuses of some of the following ETNs and ETFs:

• VXX
• VIXY, UVXY and SVXY
• UVIX and SVIX

I am often asked if these products were designed to go to zero.  No, they were not designed to go to zero.  The original intent was that these products would be short-term hedging or speculative instruments for institutions.  They do, however, have structural flaws that begin to appear as soon as these products are held for more than one day.  Over time, these structural flaws compound and will dominate the price action.

For all the reasons state above, I urge anyone considering trading VIX ETPs to review all relevant prospectuses and make a concerted effort to educate yourself on the products, their price histories and the reasons behind those price movements.  For those who insist on trading these products, it is always safest to consider defined risk trades so that the maximum loss is known in advance.  This may be a long position, a long or short position with an options hedge, or an options position such as a vertical spread that is a defined risk trade.

In the graphic below, I show the lifetime history of TVIX/TVIXF in black and TVIX.IV in red (it was the same as TVIX until it was delisted in July 2020).  Note that the Y-axis is on a log scale so that the data captures the relatively constant percentage declines, rather than the precipitous drop in price.  For fun, try to pick out any major spike in volatility on this chart other than the pandemic.

[source(s):  Yahoo, VIX and More]

Further Reading:
VXX Upside vs. Downside Risk with No New Creation Units
Barclays Suspends Creation Units for VXX
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
TVIX Creation Units Return; What It Means for Investors
Credit Suisse Suspends Creation Units in TVIX: What it Means
Why VXX Is Not a Good Short-Term or Long-Term Play
VXX Calculations, VIX Futures and Time Decay
Using Options to Control Risk in Leveraged ETFs

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

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

Euro Zone VSTOXX ETNs Land on U.S. Beaches!

Think the market is too complacent about this weekend’s election in France?  Worried that the euro area is going to crumble under the weight of Italy’s struggles?  Convinced that Greece, Portugal or Spain are just one more kicked can away from a disaster?

As of tomorrow, investors in the U.S. will have another way to translate these ideas into actionable trades with tomorrow’s launch of two new exchange-traded notes (ETNs) – EVIX (long euro zone volatility) and EXIV (inverse euro zone volatility) – from VelocityShares and UBS that put a European face on existing U.S. VIX-based products such as VIIX and perennial favorite XIV.

Based on the VSTOXX, the VIX-like volatility index for the EURO STOXX 50 Index of 50 blue-chip stocks from 11 euro zone countries, EVIX and EXIV should be familiar to those who are knowledgeable about VXX and VIIX on the long volatility side as well as XIV and SVXY on the short volatility side.  EVIX and EXIV are based on VSTOXX futures and have a target maturity of 30 days – a maturity that is maintained by rolling a portion of the portfolio each day and therefore subjecting both products to the vagaries of contango and backwardation.  In the event these are terms you are not familiar with, I strongly recommend that you click on the links above and educate yourself.  Believe it or not, this is the ninth year I have been talking about the VIX futures term structure, negative roll yield, contango and backwardation.  (Those who have been paying attention since the early days of VXX and VXZ have no doubt profited mightily from this knowledge.)

The beauty of EVIX and EXIV is that these products create so much flexibility for investors who maintain a global, cross-asset class view of volatility.  In the run-up to the first round of the French election, for example, VSTOXX spiked dramatically and pushed the VSTOXX:VIX ratio below 1.00, creating some interesting arbitrage opportunities and/or pairs trades in the process.  Now investors can trade euro zone volatility against U.S. volatility, use targeted hedges for risk that is specific to the euro zone or speculate more easily about the direction of volatility in the euro zone.

I encourage everyone to study the EVIX and EXIV prospectus closely.

This is a huge development in the volatility space and if options on EVIX and EXIV follow later this week, as expected, the volatility trading landscape will be much richer and more diverse. 

Now if we can only get liquid volatility products for gold volatility (GVZ) and crude oil volatility (OVX), I won’t even have to set out a stocking next to the chimney this Christmas.

While I’m at it, why are there no options on XIV?  This is such a popular high-beta product that it deserves options so traders can express a broader range of opinions on volatility.  Readers, it never hurts to nudge the CBOE on these issues.  An outpouring of popular sentiment can make a difference.

As the risk of charging off into full rant mode, I feel compelled to say that I hope volatility investors know a good thing when they see it.  It is a shame that VXST futures did not attract enough attention to hang around and that VMAX and VMIN are not trading with higher volumes.  One of the best volatility products ever created, ZIV, nearly died of neglect before investors finally paid it some attention.

As I see it, EVIX and EXIV as well as VMAX and VMIN are test cases for the future of the breadth of volatility products.  If you would like a diverse tapestry of volatility products in the future, it would not hurt to “buy local” volatility ETPs rather than sticking to the handful of already successful products.  If you don’t vote with your feet, you had better be happy playing in a small and rather limited sandbox.  I am fond of saying, “In volatility, there is opportunity!” – but that opportunity is a function of the richness of the various volatility product platforms.

Last but not least, I know Eurozone and eurozone are the preferred spellings, but I am sticking to the two-word “euro zone” with as much stubbornness as I can muster.  What can I say, I am short convention…

Further Reading:

• The Evolution of European Equity Risk
• Euro Volatility and Risk
• Greek Elections and the Future of the Euro
• Handicapping the Chances of Greece Dropping the Euro
• Chart of the Week: VSTOXX, VIX and the Risk of Global Contagion
• The Hollande Discount
• Expectations, Surprises and Fear in 2011
• Chart of the Week: European Stocks Holding Up Well
• Recent Performance Divergence in European ETFs
• Where and When Will the Euro Bottom?
• Greece, Spain and the Pulse of European Anxiety
• Are You Watching Greece?
• Guest Columnist at The Striking Price for Barron’s: How to Spot Risk Early
• XIV and ZIV Are Huge Success Stories Two Years After Launching
• ZIV Undeservedly Neglected
• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• The Evolution of the Volatility Index Family Tree

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

Disclosure(s): net short VXX and VMAX; net long XIV and ZIV at time of writing.  The CBOE is an advertiser on VIX and More.

The 2016 VIX Futures Term Structure: Extraordinarily Average

Two days ago, in The Year in VIX and Volatility (2016), I made no mention whatsoever of the VIX futures term structure.  Traders of the full range of VIX products (futures, options and ETPs) hopefully know by now that the entire VIX product landscape is based -- and priced -- off of VIX futures and one of the most important aspects of VIX futures is the shape of the term structure.

Long story short:  as the graphic below shows, the 2016 VIX futures term structure (double red line) was closer to its historical average (wide gray line) than any prior year since the launch of VIX futures in 2004, with the average term structure over the course of the year demonstrating a relatively modest upward sloping term structure, also known as contango.

[source(s) CBOE, VIX and More]

By way of explanation, the graphic above shows the average (mean) normalized term structure for each year since the VIX futures were launched. In normalizing the data, I have set the average front month VIX futures contract to 100 and have expressed the averages of the second through seven months as multiples of the front month.  Note that the terms structure lines are dotted and somewhat wavy for 2004 – 2006, due to the fact that the CBOE did not implement a full complement of consecutive monthly futures until October 2006.

In terms of takeaways, since I have not posted this graphic in two years, note that the term structure for 2015 was slightly flatter than average.  Looking back a couple more years, note that 2012 and 2013 saw the steepest term structure on record.  In the thirteen-year history of VIX futures, only two years saw a downward sloping term structure, also known as backwardation:  2008 and (barely, depending upon how one measures) 2009.

During the course of 2016, the VIX futures term structure moved into backwardation on four separate occasion and closed in backwardation on a total of 37 days – with 31 of those 37 days running consecutively from January 4^th to February 16^th.  These four instances and 37 days are just slightly below the average year, as can be seen in the graphic below.

[source(s) CBOE, VIX and More]

Last but not least, the average term structure for the year as well as the frequency and magnitude of the contango-backwardation dance is a strong determinant of the annual performance of the VIX ETPs and in my next post I will detail why 2016 was unlike the previous year, where Every Single VIX ETP (Long and Short) Lost Money in 2015.

Related posts:

• Average Annual Normalized VIX Futures Term Structure, 2004-2014
• VIX Futures Term Structure in 2013 Looks a Lot Like 2012
• The 2012 VIX Futures Term Structure as an Outlier
• The Year in VIX and Volatility (2016)
• Every Single VIX ETP (Long and Short) Lost Money in 2015
• The Evolution of the Holiday Effect in VIX Futures
• Revisiting the VIX:VXV Ratio
• Crazy VIX:VXV Ratio Chart
• The New VXST and the VXST:VIX Ratio
• Violent Disagreement Across VIX Futures
• Tracking the Fall in VIX Futures
• Third Steepest First-Second Month VIX Futures Contango Ever
• VIX Futures: A Tale of Two Backwardations
• New VIX Backwardation Record
• VIX Backwardation Commentary
• VIX Term Structure Evolution Over Last Ten Days
• Capitulation in Back Month VIX Futures
• VIX Futures: What Were/Are They Thinking?
• VIX Term Structure Changes Since November 20th
• Monitoring VIX Futures and Their Impact on VIX ETPs
• VXX Calculations, VIX Futures and Time Decay

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

Disclosure(s): the CBOE is an advertiser on VIX and More

Average VIX and Volatility for Last Fourteen Presidents

What kind of VIX is appropriate for the Trump Administration? 

For investors in general and volatility traders in particular, this is one of the more interesting questions going into 2017.  Should the VIX be higher or lower in the context of a Trump Administration relative to the Obama Administration?  How much economic policy uncertainty is there in Trumponomics?  How will various geopolitical issues wax and wane in the context of a Trump-Tillerson foreign policy agenda?

While these questions are difficult ones, what is not difficult is looking in the rear-view mirror for some historical context, so that is exactly what I did, calculating the historical volatility for each presidency going back to the Hoover Administration.  In order to take advantage of stock data prior to the 1950s, one has to make use of the DJIA rather than S&P averages.  While VIX data is even more interesting, the VIX was not launched until Bill Clinton’s inauguration and historically reconstructed data from the CBOE only extends back to George H. W. Bush’s presidential term.

The results of the number crunching are included in the chart below and show Herbert Hoover’s historical volatility of 42.87 more than double that of the runner-up, Franklin Delano Roosevelt who posted a historical volatility of 20.88.  The only other president to top the 20 level in terms of historical volatility was George W. Bush at 20.28.  At the other end of the spectrum, the least volatile presidency was that of Lyndon B. Johnson, where HV averaged an amazingly low 9.12.  Following LBJ on the low end are Dwight Eisenhower at 10.70 and Harry Truman at 12.20.

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

Among recent presidents, three of the last four presidencies (George W. Bush is the exception) have seen middling volatility, with Barack Obama 6^th of 14 as of today’s data, while Bill Clinton is 7^th and George H. W. Bush in 8^th place.

Since the eye canot help but see trends and patterns whether they exist in real life or not, I am obliged to observe that since the LBJ presidency there is a pattern of higher highs and higher lows.  Could volatility by presidential term be trending up?  I am certainly not ready to go that far.

In terms of key takeaways, it is worth noting that the median historical volatility (combining data from Bill Clinton and George H. W. Bush) indicates that a middle-of-the-road presidency can expect historical volatility of 14.65 and a VIX of 18.91.  As far as the VIX is concerned, the 18.91 number aligns nicely with current VIX futures quotes for May and June 2017.

Related posts:

• Post-Election Risk Trending Up in Treasuries and the Euro, Down in U.S. Stocks
• Volatility During Crises
• Event Risk, Event Theta and the Next Week
• Fear of Governments and Politicians Climb Rapidly as Euro Zone Worries Wane
• Volcker Endorses Obama
• The Case Against High Stock-Market Volatility in 2016 (Guest Columnist at Barron’s)
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events

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

Disclosure(s): the CBOE is an advertiser on VIX and More

Top VIX Crushes in History

Yesterday’s sharp downward move in the VIX gave me a reason to tweet that the volatility crush as seen in the SPX and VIX was among the top 25 in history.  Upward pressure on the VIX toward the end of the session dropped the VIX down to the 30^th largest VIX decline in history, but along the way the Twitterati raised a number of questions about volatility crushes and the VIX as a measurement tool of broad market volatility crushes.

Since I have never seen any data related to the VIX and volatility crushes before, I thought this might be an opportunity to present some of my data and talk about the findings.  In the chart below, I have captured the 25 largest one-day declines in the VIX since 1990 and have presented data showing the forward performance of the SPX in periods from one to 100 days and I have also added some brief commentary regarding the causes.  In some cases I link the volatility crush to a previous VIX spike and use some explanatory shorthand in the process.  For instance, the top crush day, May 10, 2010, followed 2 days after the 21^st largest VIX spike (“2d+ #21”).

[source(s):  CBOE, VIX and More]

Of course, most of these volatility crush days coincided with huge jumps in the SPX, but there are some interesting exceptions, not the least of which was the 0.04% decline in the SPX back on April 11, 1990.  That just happens to be the only day for which I cannot find any obvious explanatory catalyst – to the extent that a 0.04% in stocks can actually have a catalyst – but given the proximity to the upcoming Gulf War, my guess is that some sort of news related to Iraq played into this event.

Note also how many of these volatility crush instances follow other important market-moving high fear events one or two days later, in true mean reversion fashion.  Examples on this list range from the flash crash, Greece, Lehman Brothers and Bear Stearns to several VIX all-time highs, Russian political and economic crises, the Boston marathon bombing, etc.

Things get even more interesting if you compare the top 25 VIX crushes to the top 25 VIX spikes in history (for an identical table recapping the top 25 spikes refer to Last Two Days Are #5 and #6 One-Day VIX Spikes in History.)  For starters, the top 25 VIX spikes all move up at least 31%, while none of the top 25 VIX crushes managed to eclipse the 30% decline level.  Also note the differences in the mean reversion predictive value of spikes versus crushes.  In general, the performance of the SPX following VIX crushes is modestly lower than that of the SPX in general.  On the other hand, the performance of the SPX following VIX spikes is generally better than the SPX in general – much more so if the September 29, 2008 outlier is dropped from the data set.

Another point that I think is worth making speaks to the overall changes in the volatility space.  The critical data point is that 11/25 of the top 25 VIX crushes happened since the beginning 2010, while 14/25 of the top 25 VIX spikes have occurred during the same period.  This means that we have had as much in the way of big volatility moves in the list seven years as in the previous twenty years of VIX data.  In other words, the volatility landscape is changing and the rise of VIX futures and VIX ETPs are no doubt an important part of that change.

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

Related posts:

• Last Two Days Are #5 and #6 One-Day VIX Spikes in History
• VIX Sets New Record with Nine Up Days in a Row
• Volatility During Crises
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events

Disclosure(s): the CBOE is an advertiser on VIX and More

Updated VIX ETP Landscape, Including VMAX and VMIN

Now that the recently launched REX VolMAXX Long VIX Weekly Futures Strategy ETF (VMAX) and REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (VMIN) VIX exchange-traded products have started to achieve critical mass, I thought it would be a good time to update my VIX ETP landscape chart.

In the graphic below, I have plotted all of the VIX ETPs with respect to their target maturity (X-axis) and leverage (Y-axis). 

[source(s):  VIX and More]

The most interesting change in this chart is the addition of VMAX and VMIN, which are on track to trade over 100,000 as a pair today for the first time since their launch two weeks ago.  In deciding where to plot these two issues, I note that the 10-day historical volatility of VMAX and VMIN is approximately 30% higher than their more popular competitors, VXX and XIV.  As VMAX and VMIN are actively managed and do not have a fixed target maturity, I am electing to assume that based on the early history, the target maturity is in the 2-3 week range.  Additionally, while there is no leverage being used in the traditional sense, as is the case with UVXY, TVIX and TVIZ, so far the use of VIX weekly futures in addition to the standard monthly VIX futures means that VMAX and VMIN have a higher beta than VXX and XIV.  For this reason, I have also plotted VMAX and VMIN as having slightly higher "leverage" than the group of VIX ETPs that have a target maturity of thirty days, such as VXX, XIV, etc.

Frankly, I am a little surprised that VMAX and VMIN have not attracted more interest in the trading community, as these products have features that should be very attractive to short-term traders.  For now, the bid ask-spreads are typically in the 0.05 – 0.10 range, but as these tighten up, I expect volume and trading interest will ramp up quickly.

One necrology housekeeping note of interest:  Citibank has decided to redeem early its C-Tracks Exchange-Traded Notes Based on the Citi Volatility Index Total Return (CVOL).  The last day of trading for CVOL will be May 23, 2016, with cash payments to be made to investors on May 24, 2016.  The diagonal “X” through the ticker symbol in the chart indicates that this is the last time CVOL will appear on this graphic.

Finally, when one is trading VIX ETPs, it is always essential to consider the degree of contango (or backwardation) in the VIX futures, which can translate into substantial negative roll yield.  For the record, the current month is on track to have the third largest average negative roll yield for the month in the thirteen-year history of the VIX futures.  For those who may be interested, the top two months in terms of extreme negative roll yield were March 2012 and July 2004.

Related posts:

• VMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years
• Every Single VIX ETP (Long and Short) Lost Money in 2015
• Will TVIX Go To Zero?
• Four Key Drivers of the Price of TVIX
• All About UVXY
• Charting the Assets of the Volatility-Based ETPs
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• Disappointment Lurks as Volume Surges in VXX
• Who Trades the VIX and VXX?
• First Day of Trading in VXX and VXZ a Success
• CVOL Steps It Up
• Interesting New Leveraged Volatility ETN Coming from Citi

Disclosure(s): net short VXX, VMAX, UVXY, TVIX and TVIZ; net long XIV, VMIN and ZIV at time of writing

[source(s):  VIX and More]

The Current VIX ETP Landscape

I have been writing about VIX ETPs since the launch of the initial duo of VXX and VXZ back in January 2009 and from 2010 onward I have been plotting all of them on a leverage/maturity grid like the one below. It is amazing how often various VIX ETP investors mentioned one of these charts when I talk to them. Even through the VIX ETP space has been relatively stable as of late, I have not updated this graphic since early 2014, so a refresh is long overdue.

For those who have not been following along over the years, I have plotted every VIX-based ETP using leverage on the Y-axis and maturity on the X-axis. With the advent of what I am calling VIX strategy ETPs, I have isolated in their own box in the lower right hand corner a half dozen of these products whose characteristics do not necessarily imply a fixed point on Cartesian coordinate system.

The key at the bottom highlights various salient features of each of these products. From previous incarnations, I have retained the presence of non-VIX legs (typically positions in SPX/SPY), the combination of both long and short legs, dynamic allocation of the legs and optionability. I have also shaded areas where there is high leverage/compounding risk as well as high roll yield risk. Not surprisingly, these risks converge at TVIX and UVXY, two of the more infamous VIX ETPs.  Another carryover is font color, where black indicates ETFs and blue is for ETNs.  This time around I have also added yellow stars for those ETPs with an average daily volume of 1,000,000 or higher and pink stars for ETPs with an average daily volume between 100,000 and 1,000,000. Note that while CVOL technically makes the cut, at today’s closing price of 0.40, any sort of meaningful reverse split to raise the price about 5 or 10 would highlight just how illiquid this issue is. In fact, only six VIX ETPs pass the one million share screen: TVIX, UVXY, VIXY, VXX, SVXY and XIV.

[source(s): VIX and More]

There are three new additions to this graphic. The most notable of these are VXUP and VXDN, which were launched by AccuShares back in May. These products deserve a post (or series of posts) dedicated to some of the issues surrounding them, but the short version is that high complexity, frequent distributions and consistent tracking errors resulted in a product that investors decided was not worth their trouble. The other “new” products is, VQTS, the first ETP that tracks the SPX VEQTOR Switch Index, making it a relative of VQT and PHDG, but one which uses a dynamic allocation to VIX futures to achieve a 10% target realized (historical) volatility. VQTS was launched in December 2014 and like most VIX ETPs, has struggled to reach critical mass.

While the VIX ETP market is showing some signs of maturing, there are many new and exciting developments in terms of low volatility ETPs and more broadly in the ETP space in general. As I am currently at the IMN 20th Annual Global Indexing & ETF Conference – and scheduled to speak on a panel, “Trading the VIX: Riding Today's Waves of Volatility” with Larry McDonald, Mark Shore and Matt Moran tomorrow – this seems like a good time to devote more time to writing and in particular to resurrecting the “and More” portion of this blog.

Related posts (a selection from literally hundreds of posts on VIX ETPs):

• Performance of VIX ETPs in 2013
• Performance of VIX ETPs During the Recent Debt Ceiling Crisis
• VIX ETP Performance in 2012
• Expanded Performance of Volatility-Hedged and Related ETPs
• Performance of Volatility-Hedged ETPs
• Performance of VIX ETP Hedges in Current Selloff
• Comparing SPLV and VQT
• ZIV Undeservedly Neglected
• Will TVIX Go To Zero?
• Four Key Drivers of the Price of TVIX
• Credit Suisse Suspends Creation Units in TVIX: What It Means
• TVIX Creation Units Return: What It Means for Investors
• All About UVXY
• The Case for VQT
• Slicing and Dicing all 31 Flavors of the VIX ETPs
• Charting the Assets of the Volatility-Based ETPs
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• First Day of Trading in VXX and VXZ a Success

Disclosure(s): net short VIX, VXX, UVXY and TVIX; net long SVXY, XIV and ZIV at time of writing

VIX Weekly Futures and Options Expire Tomorrow (Tuesday); Last Trading Day Is Today

Just a quick public service announcement to remind traders of VIX futures and options that the VIX weekly futures and options, which the CBOE launched earlier this year, will expire tomorrow instead of the usual Wednesday expiration.

The reason for the unusual Tuesday expiration is the Christmas holiday calendar. Keep in mind that VIX options expire 30 days before the underlying S&P 500 Index options on which they are based. As Christmas Day falls on a Friday this year, the SPX weekly options for the fourth week in December have their expiration moved up to Thursday, December 23, with the VIX weeklys for the fourth week in November moved up to tomorrow. Perhaps even more important, this means that this week’s VIX weeklys can last be traded today, so if you harbor any intentions about opening or closing a short-dated VIX weekly options (or futures) position tomorrow, be sure to make that happen today instead.

As an aside, as I see it, the VIX weeklys are the most important product launch in the volatility space in several years. The VIX weekly futures were launched in July, followed by a launch of the VIX weekly options in October. How popular are these products? Well, the VIX weekly options that expire tomorrow have an open interest of just under 100,000 contracts as I type this, as the graphic below demonstrates.

[source(s): Livevol Pro / CBOE]

The VIX weeklys have already become a staple of my client portfolios and are something every volatility investor should investigate. If you are one of those who has shied away from weeklys or is not comfortable trading options close to expiration, one book that I’m sure will give you something to think about along those lines is Jeff Augen’s, Trading Options at Expiration.

It should go without saying every options trader should have their own options calendar handy in order to help identify these calendar anomalies in advance. My personal favorites are as follows:

• CBOE Options Expiration Calendar
• OIC Options Expiration Calendar

Note that the links above are for 2016. For 2015 or for any other year, just edit the URL accordingly.

Finally, I have missed blogging on a regular basis and am committed to getting back into the game this week, ramping up my activity into the December FOMC meeting.

Related posts:

• Another Winner From Jeff Augen
• Trading Options Expiration Days
• The Convergence of VIX and VIX Futures at Expiration
• VIX March Futures and Options Expiration on Tuesday, Not Wednesday
• VIX Expiration Straddles
• VIX Expiration Condors
• Selling VIX Puts Pre-Expiration
• Weekly Options Coming on Strong
• A Favorite Trade: VXX Weeklys
• VIX Performance During the Options Expiration Cycle

Disclosure(s): short VIX at time of writing; the CBOE and Livevol are advertisers on VIX and More

Average Annual Normalized VIX Futures Term Structure, 2004-2014

One graphic I post periodically that never fails to generate a great deal of interest among traders, strategists and other volatility aficionados is my normalized VIX futures term structure graph. From 2008 – 2013, the annual normalized term structure was notable in that almost every year was an outlier in one way or another. For instance, 2012 and 2013 were the two years with the steepest contango in history, while 2008, 2009 and 2011 represent three of the four years (2007 being the fourth) with the flattest term structure.

And 2014? It could not have been more average. If one combines all the years from 2004 to 2014 and creates an “average year” (i.e., the wide gray line on the chart) then 2014 (double blue line) comes closest to that average.

[source(s): CBOE, VIX and More]

Note that the terms structure lines are dotted and somewhat wavy for 2004 – 2006, due to the fact that the CBOE did not implement a full complement of consecutive monthly futures until October 2006.

As for 2015, which is not plotted on the graph above, so far it looks quite flat, almost like a cross between 2007 and 2009. It will be interesting to see if this pattern holds for the balance of the year.

Related posts:

• VIX Futures Term Structure in 2013 Looks a Lot Like 2012
• The 2012 VIX Futures Term Structure as an Outlier
• The Evolution of the Holiday Effect in VIX Futures
• Revisiting the VIX:VXV Ratio
• Crazy VIX:VXV Ratio Chart
• The New VXST and the VXST:VIX Ratio
• Violent Disagreement Across VIX Futures
• Tracking the Fall in VIX Futures
• Third Steepest First-Second Month VIX Futures Contango Ever
• VIX Futures: A Tale of Two Backwardations
• New VIX Backwardation Record
• VIX Backwardation Commentary
• VIX Term Structure Evolution Over Last Ten Days
• Capitulation in Back Month VIX Futures
• VIX Futures: What Were/Are They Thinking?
• VIX Term Structure Changes Since November 20th
• Monitoring VIX Futures and Their Impact on VIX ETPs
• VXX Calculations, VIX Futures and Time Decay

Disclosure(s): the CBOE is an advertiser on VIX and More

Fear Poll: Fed/QE, Ebola and Technicals Top Worry List

Stocks may be in the process of putting in a bottom, but with the VIX hitting 31.06 yesterday at the same time VIX futures were setting new volume records, investor fear and anxiety is as high as it has been since the 2011 European sovereign debt crisis.

As the VIX and More Fear Poll results reflect, the current situation is particularly difficult for investors to grapple with because there is so much disagreement about what the biggest worry is and how some of these fears may be connected.

In the chart below, I have summarized the almost 400 votes from some 35 countries, with the U.S. accounting for 65% of all respondents.

It is worth noting that the responses appear to be somewhat headline driven, as yesterday Ebola topped the list of worries, only to be supplanted by concerns about the impact of the Fed ending quantitative easing and in so doing removing the safety net that has helped keep liquidity high, volatility low and investors more confident. I also find it particularly interesting that “market technical factors (breach of support, end of trend, weak internals, etc.)” are so important to a broad range of investors, which raises the question of whether technicals are more of a cause or effect in the recent downturn.

Looking at global economic weakness, slightly more investors expressed concern about the U.S. economy than that of the euro zone, with concerns about the Chinese economy a distant third.

In these types of polls, I am always interested to see how U.S. respondents differ from those outside of the U.S. In the current market environment, U.S. respondents tend to place more emphasis on the weak U.S. economy and the Ebola virus, while paying less attention to currency issues and China. Some of the detailed results certainly have a whiff of provincialism, yet it remains to be seen whether the global or Americentric perspective does a better job of honing in on what to focus on – a subject I will delve into at a later date.

For those who might be interested in the results of prior VIX and More Fear Poll data, the links below should be a helpful reference.

Last but not least, many thanks to everyone who participated in this poll, which I intend to periodically reprise as market conditions warrant.

[source(s): VIX and More]

Related posts:

• Investor Fears Pivot to U.S. Deficit and Debt Ceiling Following Cliff Deal
  Just a Change of Venue? (Fears About U.S. Deficit/Debt Ceiling Replacing Fiscal Cliff Worries)
• Fiscal Cliff Continues to Top Fear Poll
• Fear Poll Respondents Focus on Fiscal Cliff, Dismissive of European Financial Crisis
• Fear of Governments and Politicians Climb Rapidly as Euro Zone Worries Fade
• Fiscal Cliff Concerns Top Fear Poll, But Central Banks and Politicians Seen as Key Systemic Threats
• Fiscal Cliff and European Sovereign Debt Concerns Recede, Earnings Worries Linger
• Calm Down and Exploit Others’ Anxieties (Barron’s)
• Fear Poll: Fiscal Cliff Fears Spike , Concerns About Excessive Central Bank Interventions Rise
• Fiscal Cliff Worries Grow as Election Nears
• U.S Fiscal Cliff Fears Top VIX Fear Poll Again
• U.S. Fiscal Cliff Concerns Top Results in Inaugural VIX and More Fear Poll

Disclosure(s): none

CBOE RMC 2014: A Retrospective

Earlier this month, I had the pleasure of attending the CBOE Risk Management Conference (RMC) in Bonita Springs, Florida. Now that the conference is over and the CBOE has posted most of the presentations, I thought I would take a little time and offer a retrospective look at some of the content that caught my attention.

Before I do that, I am compelled to tip my cap to Russell Rhoads, whose indefatigable and prolific efforts were responsible for capturing many of the details of the conference. Russell’s posts and those of Matt Moran made it possible for anyone to have a virtual front-row seat throughout the proceedings. Their efforts in conjunction with the RMC are archived at the CBOE Options Hub with the CBOERMC tag.

From my vantage point, I thought it particularly interesting that the two keynote speakers, Martin Zonis and Carl Tannenbaum, had such divergent views about the potential risks and rewards in the U.S. financial markets in the coming years. Zonis placed most of his attention on political risk and foreign policy matters and declared that the markets were “underestimating volatility in future years.” While Tannenbaum expressed concern about banks in Europe as well as credit and real estate in China, he had a much more sanguine view of the future of the U.S. economy and financial markets.

Among the other presentations, I was particularly interested to hear Maneesh Deshpande provide an overview of the players and strategies used in volatility products during the course of the evolution of the VIX product platform. Deshpande described the VIX futures as a mature market, with liquidity and supply having shifted from commercial to con-commercial traders. He also indicated that demand for VIX puts has stagnated, while new entrants are increasing the demand for VIX calls. All of this has influenced how the VIX spikes and mean reverts, as well as how the VIX futures term structure has evolved.

Another particularly interesting session involved Ed Tom and John-Mark Piampiano, who tackled the subject of the volatility of volatility, invoking the likes of VVIX as well as the third and fourth derivatives of SPX implied volatility. At every conference at least one session gives you things to mull over long after the speakers are done and for me, this was the session that hit the high notes. Ed Tom’s presentation has not yet been posted, but he started his talk by decomposing VIX risk premium into realized volatility plus skew plus kurtosis and went on from there.

Sheldon Natenberg and Trevor Mottl were tasked with the subject of evaluating the volatility surface: skew and term structure. Not surprisingly, they were up to the task, with Mottl focusing on the role of money and credit in shaping the volatility surface. He indicated that the increasing size of the Fed’s balance sheet has depressed volatility across the board over the course of the past few years and expects that as the Fed’s balance sheet normalizes, the change in non-financial debt will become the most important influence on equity market volatility going forward. Mottl attributed the steepness of the VIX futures term structure to the uncertainty related to the Fed’s ability to be successful with its quantitative easing program. He also traced fluctuations in the skew of volatility to expectations related to the Fed’s tapering plans.

Among the other presentations I sat in on were:

• a panel on volatility as an asset class (the consensus that volatility is more of a tool and in order to be thought of as an asset class needs to harvestable, allocatable and easier to benchmark; a separate thread was critical of the costs associated with traditional approaches to tail hedges)
• a discussion of trading volatility across asset classes (included an interesting set of metrics and trade ideas)
• a wide-ranging session on the design and trading of VIX and other volatility derivatives, which had a detailed explanation of the VIX settlement process as well as a discussion of VXST, which is expected to gain much more momentum when options on the index become available on April 10

Finally, I had an opportunity to sit down with Angela Miles of CBOE TV to offer my thoughts on the second day of RMC:

 

For those who may be interested, the 3rd Annual CBOE RMC will be held September 3-5, just south of Dublin, Ireland.  Since all of my ancestors trace their roots back to Ireland, I can’t imagine a better place to hear about the latest thinking in volatility and ponder the miracle of Guinness draught at the same time.

Related posts:

• CBOE Risk Management Conference Update
• Some Thoughts on the CBOE RMC
• Best VIX Conference of the Year? Try the CBOE RMC
• The Upcoming 2012 CBOE Risk Management Conference
• The VIX Summit, a.k.a. the CBOE Risk Management Conference
• Best VIX/Volatility/Risk Conference of 2013?

Disclosure(s): CBOE is an advertiser on VIX and More

VIX March Futures and Options Expiration on Tuesday, Not Wednesday

Just a quick reminder for those who may not be aware of it that the VIX futures and options expiration for March falls on next Tuesday, March 18^th, not the typical Wednesday. This means that the VIX special opening quotation (SOQ) used to determine the March settlement price will be at the open on Tuesday and also the last trading day for the VIX March futures and options will be on Monday. With the speed at which things are developing in Ukraine and elsewhere, these 24 hours could turn out to be significant.

For those who are interested in a link to the VIX options expiration calendar, the CBOE maintains a 2014 options expiration calendar here, with the VIX expiration highlighted in a solid dark orange box. Note that I have a link to the CBOE options expiration calendar on the blog at the bottom of my VIX, Sentiment & Options section.

To review how the VIX expiration dates are determined, the VIX futures and options expire 30 days before the SPX monthly options expiration in the following month. These SPX options expirations are almost always on a Friday, therefore the VIX expiration is almost always on the Wednesday four weeks and two days prior to the SPX expiration. The complication factor for the VIX March 2014 expiration cycle is that on Friday, April 18, the CBOE is closed due to the Good Friday holiday, which pushes up the April SPX expiration to Thursday, April 17, with the result that the VIX March expiration is pushed up one day as well.

Last but not least, the VIX SOQ probably deserves a separate post in order to explain some of its unique characteristics, but it is worth noting that the VIX SOQ is not the price at which the VIX opens, but rather another separate calculation that takes place at the open.

Related posts:

• The Convergence of VIX and VIX Futures at Expiration
• VIX January Options as Short-Term Portfolio Protection
• Pricing of VIX August and September Calls
• Another Record Day in VIX Call Volume
• Selling VIX Puts Pre-Expiration
• A VIX Butterfly Play
• Follow-Up to “A VIX Butterfly Play”
• Lots of Premium Left on Last Day of Trading in VIX November Options
• SPX Options Carpet Bomb Pushes VIX SOQ to 63.04 (!)

Disclosure(s): CBOE is an advertiser on VIX and More

VXX and VXZ Now Five Years Old!

In the midst of all the emerging markets turmoil, I wanted to take a moment to acknowledge the fifth birthday of the two pioneering VIX ETPs : VXX and VXZ. Launched five weeks before stocks hit their 2008-09 financial crisis bottom, both VXX and VXZ have struggled against a tide of falling volatility over the course of the past five years and have also been battered by persistent contango in the VIX futures, which has created additional head winds in the form of negative roll yield.

The table below captures the grim history of these two products, looking at product lifecycle years from January 30^th to January 30^th:

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

Note that even though each of the five years have been losing years for both products, there have been periods in which these products have been extremely strong performers. One of these periods was from July to October 2011 when VXX nearly tripled (maximum gain of 198%) and VXZ rallied some 66%. I mention this because both have performed well in January, with VXX up 13.0% as I type this and VXZ with gains of 2.2% for the year.

While I am not going out on a limb and predicting a renaissance for these two VIX ETPs, they are two of the most important and liquid VIX ETPs on the market and can be attractive hedges or speculative trades when the markets go through a period of selling and/or there are concerns about a potential crisis.

I have been writing about these even before they were launched and will continue to offer my thoughts on them going forward.

Related posts:

• Performance of VIX ETPs in 2013
• VIX ETP Performance in 2012
• VIX Exchange-Traded Products: The Year in Review, 2011
• Performance of VIX ETPs During the Recent Debt Ceiling Crisis
• VXX, VXZ, XIV and ZIV During Eleven Months of a Sideways VIX
• A Monthly Comparison of VXX and VXZ
• XIV and ZIV Are Huge Success Stories Two Years After Launching
• VIX Futures Term Structure in 2013 Looks a Lot Like 2012
• VXX and VXZ Celebrate Fourth Birthday
• VXX Celebrates Third Birthday
• Chart of the Week: VXX Celebrates 2^nd Birthday
• VXX Calculations, VIX Futures and Time Decay
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Monthly Performance
• Chart of the Week: VXX Celebrates One Year of Futility
• Chart of the Week: VXX vs. VIX
• Managing Risk with a Short VXX Position
• Charting the Assets of Volatility-Based ETPs

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

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

VIX Futures Term Structure in 2013 Looks a Lot Like 2012

This was a very quiet year for the VIX, with the volatility index posting its second narrowest range for the year since 1995, trailing only 2005, when the Greenspan liquidity flood overwhelmed even the mere thought of a meaningful correction.

The graphic below shows the average (mean) normalized term structure for each year since the VIX futures were launched, back in 2004. In normalizing the data, I have set the average front month VIX futures contract to 100 and have expressed the averages of the second through seven months as multiples of the front month.

[source(s): CBOE Futures Exchange (CFE)]

Note that although the VIX futures were launched in 2004, consecutive VIX futures contracts for the first six months were not available until October 2006, hence the dotted lines for these years to reflect the erratic nature of the data. Interestingly, the lower VIX years of 2005 and 2006 did not produce the steep term structure that we saw in 2012 and saw again in 2013. Last year I described the 2012 VIX futures term structure as a statistical outlier, but now that 2013 data is in the books, it may be more appropriate to think about how the markets might have changed in the last two years, with potential causes that range from the VIX ETPs, more interest in trading volatility products, the rise of weekly options and other developments.

In the next few days I will devote a series of posts to analyzing some VIX, volatility and related data for 2013, then as 2014 unfolds I will offer some thoughts on how some of these markets are changing and evolving.

At the very least, I expect to ramp up my posting substantially in 2014, now that I have my investment management business up and running and find it easier to wear multiple hats at the same time.

Happy New Year!

Related posts:

• The 2012 VIX Futures Term Structure as an Outlier
• The Evolution of the Holiday Effect in VIX Futures
• Revisiting the VIX:VXV Ratio
• Crazy VIX:VXV Ratio Chart
• The New VXST and the VXST:VIX Ratio
• Violent Disagreement Across VIX Futures
• Tracking the Fall in VIX Futures
• Third Steepest First-Second Month VIX Futures Contango Ever
• VIX Futures: A Tale of Two Backwardations
• New VIX Backwardation Record
• VIX Backwardation Commentary
• VIX Term Structure Evolution Over Last Ten Days
• Capitulation in Back Month VIX Futures
• VIX Futures: What Were/Are They Thinking?
• VIX Term Structure Changes Since November 20th
• Monitoring VIX Futures and Their Impact on VIX ETPs
• VXX Calculations, VIX Futures and Time Decay

Disclosure(s): none