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
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

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

Disclosure(s): long VXX at time of writing

The Evolution of the VIX (1)

 
Volatility is notorious for clustering in the short-term, mean-reverting in the medium-term and settling into multi-year macro cycles over the long-term.  I have chronicled each of these themes in this space in the past.

Apart from volatility, I have also taken great pains to talk about the movements of the VIX, which is one of the most famous instances of implied volatility and represents investor expectations about future volatility in the S&P 500 Index for the next thirty calendar days.  Surprising to some, the VIX and volatility (which generally refers to realized or historical volatility), while correlated, are very different animals.  Not only are these two very different, their evolutions have been very different as well.  Volatility, which has a much longer history, seems to exhibiting the same traits that it has exhibited throughout its lifetime, with relatively modest tweaks around the edges from time to time.

The same cannot be said for the VIX.  One thing about the VIX that has changed in the three decades or so of VIX data is the speed at which the VIX has moved up and down.  In a nutshell, VIX cycle times have shortened dramatically.  In other words, the VIX now has a tendency to spike much faster and mean-revert downward much faster as well.  This phenomenon has been ongoing for the past decade or so, but it became more pronounced following the Brexit craziness – or at least the first chapter of the Brexit craziness.

One way you can see how the changes in the VIX have differed from the changes in the volatility of the SPX is to look at volatility spikes.

In the first graphic, below, I show the number of days per year with 2% and 4% moves in the SPX going back to 1990.  Take note of the ebbs and flows in volatility and the clustering of volatility around the dotcom bubble and again around the 2008 Great Recession.

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

In the second graphic, I plot annual VIX spikes of 20% or more for each year going back to 1990.  Note that while visual inspection does not reveal any obvious trend in the SPX volatility data, the VIX spike data for the same period show a pronounced upward trend, reflecting the heightened sensitivity of the VIX to changes in volatility of the SPX.  In other words, even though volatility may be the same, the VIX is becoming more sensitive to volatility.  Another example that supports this point:  of all the one-day spikes in the VIX of 30% or more, 71% have happened in the past decade and only 29% are from the previous two decades.  The volatility landscape may or may not be changing, but the VIX is.

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

Further Reading:
Clustering of Volatility Spikes
Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s)
What My Dog Can Tell Us About Volatility
My Low Volatility Prediction for 2016: Both Idiocy and Genius
What Is Historical Volatility?
Calculating Centered and Non-centered Historical Volatility
Rule of 16 and VIX of 40
Shrinking VIX Macro Cycles
Chart of the Week: VIX Macro Cycles and a New Floor in the VIX
The New VIX Macro Cycle Picture
Recent Volatility and VIX Macro Cycles
VIX Macro Cycle Update
Was 2007 the Beginning of a New Era in Volatility?
VIX Macro Cycles
Last Two Days Are #5 and #6 One-Day VIX Spikes in History
2014 Had Third Highest Number of 20% VIX Spikes
Today’s 34% VIX Spike and What to Expect Going Forward
All-Time VIX Spike #11 (and a treasure trove of VIX spike data)
The Biggest VIX Spike Ever: A Retrospective
VIX Sets Some New Records, Suggesting Volatility Near Peak
Highest Intraday VIX Readings
Short-Term and Long-Term Implications of the 30% VIX Spike
VIX Spike of 35% in Four Days Is Short-Term Buy Signal
VXO Chart from 1987-1988 and Explanation of VIX vs. VXO
Volatility History Lesson: 1987
Volatility During Crises
Chart of the Week: VXV and Systemic Failure
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): short VIX at time of writing

Ten Years Since the Biggest VIX Spike Ever

Ten years ago today, we witnessed that largest one-day VIX spike in the nearly three decade history of the VIX.  On that day, the VIX rallied from a prior close of 11.15 to 18.31 – a 64.2% gain.  The move came in conjunction with a 3.5% decline in the SPX (large, but nothing like what would follow during the next two years) and followed overnight concerns related to the Chinese government raising interest rates to discourage speculation.  The fears in China were largely responsible for a 8.8% loss in the Shanghai Composite Index and a 9.9% loss in the FTSE/Xinhua China 25 index that is the basis for the popular Chinese ETF, FXI.

In retrospect, the biggest VIX spike of all was a short-lived phenomenon whose fundamental and technical underpinnings turned out to pose no lasting threats.  As is often the case, traders who faded this move (and keep in mind there were no VIX ETPs available at that time) and bet on mean reversion cleaned up on that trade.

So, did this move in 2007 provide a hint as to what would follow in 2008?  As I see it, the timing was merely a coincidence.

It may not be a coincidence, however, that the biggest VIX spike in history helped to usher in the golden era of VIX spikes, with 15 of the top 22 one-day VIX spikes of all time having occurred during the past decade, as is reflected in the graphic below.  Of course, most of the spike in VIX spike activity was the result of the Great Recession and some of the “disaster imprinting” that followed such a severe shock to many investor psyches.

[source(s): VIX and More]

Some may look around at a VIX that is not too much different now than it was a decade ago and wonder what it might take to trigger another 64% jump in the VIX.  Certainly there is a huge policy uncertainty overhang at the moment, lots of political (and related economic) uncertainty in Europe and there are always some black swans lurking just out of our sightlines.

For now, however, will just have to live with that eerie, unsettling feeling that often accompanies low volatility and wait for another bump in the night before we reassess the volatility landscape.

Further Reading:

• The Biggest VIX Spike Ever: A Retrospective
• Lessons from the Post-2/27 VIX Price Action
• Four Ways to Play VIX Options Following a Record 64% Move to 18.31
• How to Think About the Day After: Executive Summary
• Birthday Party?
• Last Two Days Are #5 and #6 One-Day VIX Spikes in History
• 2014 Had Third Highest Number of 20% VIX Spikes
• Today’s 34% VIX Spike and What to Expect Going Forward
• All-Time VIX Spike #11 (and a treasure trove of VIX spike data)
• VIX Sets Some New Records, Suggesting Volatility Near Peak
• Highest Intraday VIX Readings
• Short-Term and Long-Term Implications of the 30% VIX Spike
• VIX Spike of 35% in Four Days Is Short-Term Buy Signal
• Availability Bias and Disaster Imprinting
• VIX Data to Support Availability Bias and Disaster Imprinting Hypothesis
• The VIX:VXV Ratio, Availability Bias and Disaster Imprinting

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

Disclosure(s): none

Clustering of Volatility Spikes

Last week, my Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) triggered a bunch of emails related to the clustering of low volatility.  Most readers expressed an interest in the phenomenon of volatility clusters occurring in both high and low volatility environments and were curious about the differences between high and low volatility clusters.

When it comes to measuring volatility clusters I am of the opinion that realized or historical volatility is a more important measurement than implied volatility measurements, such as is provided by the VIX.  When I think in terms of VIX spikes, I generally focus on two single-day realized volatility thresholds:  a 2% decline in the S&P 500 Index and a 4% decline.

The graphic below is in many respects the inverse of the graphic in Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) – and this should come as no surprise.  Simply stated:  while both high volatility and low volatility cluster in the short-term, volatility regimes tend to persist for several years, so it is very rare to see a clustering of high and low volatility in the same years.  This is exactly the principle I laid out more than ten years ago regarding echo volatility in What My Dog Can Tell Us About Volatility.

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

Note also that in spite of all the talk in the past few years of the potential implosion of the euro zone, a hard landing in China, central banks across the globe creating the seeds of our destruction, increasingly bipartisan politics creating deep divides across the nation, etc., etc. – volatility has been relatively mild during the past 5-6 years.

The interesting thing about volatility regimes is that they eventually transition from low volatility environments to high volatility environments and vice versa and create what I call VIX macro cycles in the process.  The volatility transition phases are some of the most interesting times in the market and can certainly be some of the most profitable.  These inflection points are sure to be a target of some of my future writing on volatility.

So, as VIX and More sails off into its second decade of publication, I vow to flesh out some of my evolving thinking on subjects I have touched upon above (some of which have lain dormant in this space for several years) at the same time I charge off into new areas.  While I will continue to have a laser focus on volatility (particularly its global, multi-asset class aspects), it is time to pay more attention to the “and More” portion of this title of this blog and make a push into new frontiers.  Said another way:  my thinking likes to cluster, but it likes to spike as well.

Finally, most posts tend to touch on one or two key ideas, so I typically put a half dozen or so links below that I refer to as “Related posts.”  Today, it seems as if I have touched briefly on so many subjects that more links (I’m sure today’s is a new record) seem appropriate and instead of referring to these as related posts, they are now officially Further Reading going forward.  Enjoy!

Further Reading:

• Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s)
• What My Dog Can Tell Us About Volatility
• My Low Volatility Prediction for 2016: Both Idiocy and Genius
• What Is Historical Volatility?
• Calculating Centered and Non-centered Historical Volatility
• Rule of 16 and VIX of 40
• Shrinking VIX Macro Cycles
• Chart of the Week: VIX Macro Cycles and a New Floor in the VIX
• The New VIX Macro Cycle Picture
• Recent Volatility and VIX Macro Cycles
• VIX Macro Cycle Update
• Was 2007 the Beginning of a New Era in Volatility?
• VIX Macro Cycles
• Last Two Days Are #5 and #6 One-Day VIX Spikes in History
• 2014 Had Third Highest Number of 20% VIX Spikes
• Today’s 34% VIX Spike and What to Expect Going Forward
• All-Time VIX Spike #11 (and a treasure trove of VIX spike data)
• The Biggest VIX Spike Ever: A Retrospective
• VIX Sets Some New Records, Suggesting Volatility Near Peak
• Highest Intraday VIX Readings
• Short-Term and Long-Term Implications of the 30% VIX Spike
• VIX Spike of 35% in Four Days Is Short-Term Buy Signal
• VXO Chart from 1987-1988 and Explanation of VIX vs. VXO
• Volatility History Lesson: 1987
• Volatility During Crises
• Chart of the Week: VXV and Systemic Failure
• Euro Volatility and Risk
• The Evolution of European Equity Risk
• 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): none

VIX ETPs Flash Some Green in 2016

Last year I shocked quite a few investors and media outlets with the publication of Every Single VIX ETP (Long and Short) Lost Money in 2015.  My intent was not to tar and feather the VIX exchange-traded products landscape, but to highlight the fact that in an environment characterized by sharp VIX spikes and other volatility extremes, the power of volatility compounding price decay can overwhelm both long and inverse ETPs. 

In sharp contrast to across-the-board losses in 2015, the performance of VIX ETPs in 2016 was much more balanced and in line with historical norms.  While there were some sharp VIX spikes, the combination moderate volatility, above-average contango and persistent mean reversion translated into a sharp down year for the long VIX ETPs and a strong up year for the inverse VIX ETPs.  The more complex multi-leg, long-short and dynamic VIX strategy ETPs were closest to breaking even for the year, with half of these posting modest gains and half posting small losses.

In the graphic below, I have plotted the performance of all twenty VIX-based ETPs with respect to leverage and maturity, using leverage on the y-axis and maturity on the x-axis.  This group includes five VIX strategy ETPs that have no easily discernible point on the leverage-maturity grid.  Depending on how finely you wish to split hairs, these twenty ETPs account for anywhere from fourteen to eighteen unique ways to trade volatility long and short, across various maturities and according to a wide variety of strategic approaches. 

[source(s): VIX and More]

On the plus side, while both XIV and SVXY were up over 80% during calendar 2016, this performance falls short of the 2012 and 2013 numbers, where each ETP gained more than 100% in both years.  Similarly, while losses of over 93% for UVXY and TVIX must sound like a worst-case scenario for these two products, losses were over 97% in 2012 and just slightly better – at -92% – in 2013.  In terms of consistent winners, while their numbers have been more modest, the most consistent gainers in the VIX ETP space have been ZIV, TRSK and SPXH.

Two new VIX ETPs entered the fray in 2016:  VMIN and VMAX.  While these products have not yet attracted the interest of investors that I believe is warranted (VMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years), there is still time for investors to discover these products.  For the record, VMIN was launched on May 2, 2016 and outperformed both XIV and SVXY from the launch date until the end of the year, racking up an impressive 80.5% return in just eights months of trading.  Going forward, I would expect VMIN to regularly be the top performer in any period in which the inverse ETPs post positive returns.

For those who may be wondering, the VIX index was down 22.9% for the year, while the front month VIX futures product ended the year with a loss of 18.3%.

As is typically the case, contango was a significant performance driver during the course of the year.  Contango affecting the front month and second month VIX futures averaged a relatively robust 8.3% per month during the year (the highest since 2012), while contango between the fourth month and seventh month was slightly above average at 1.8% per month.

During the course of the year, five VIX ETPs were shuttered.  These include VXUP and VXDN, XVIX, CVOL and VQTS.  The biggest factors in the demise of these products was a lack of volume and assets.  In the case of VXUP and VXDN, the product complexity and cumbersome array of distributions also helped to quell investor enthusiasm.  Last but not least, I elected to drop XXV and IVOP from this list as these zombie ETPs both have less than 1% exposure to their underlying volatility index due to the lack of daily rebalancing.  As a result, these have become almost entirely all-cash vehicles, with a dash of volatility.  (For those who are curious about these instruments, follow the links above, click on the link to the prospectus and do a keyword search for “participation.”)

As an aside, for those who may be wondering, the flurry of recent posts is not an anomaly.  There is a lot to be said about the VIX, volatility, ETPs, market sentiment and many of my other areas of interest. With the the-year anniversary of the VIX and More blog just three days away, this seems like a good time to dive head first back into the fray.

Related posts:

• The Year in VIX and Volatility (2016)
• The 2016 VIX Futures Term Structure: Extraordinarily Average
• My Low Volatility Prediction for 2016: Both Idiocy and Genius
• Every Single VIX ETP (Long and Short) Lost Money in 2015
• 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

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

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

The Year in VIX and Volatility (2016)

The consensus called for a big uptick in volatility in 2016 and while there was a lot of drama, the VIX spikes were relatively manageable and short-lived.  The VIX opened the year at 22.48 and ended the year at just 14.04.  For the full year, the median VIX was 14.31, while SPX historical volatility for the full year ended up at a mere 13.12.

That being said, there were five distinct VIX spikes in the graphic below, listed according to chronology:

• Fears related to slowing growth in China (January)
• A plunge in crude oil prices to $26.05/bbl. for WTIC, as investors grappled with the possibility that Cushing storage facilities would be exhausted (February)
• The surprise Brexit vote result in favor of the U.K. leaving the E.U. (June)
• A cocktail of nearly simultaneous shocks from Fed President Rosengren (suddenly sounding hawkish), Jeff Gundlach (interest rates have bottomed) and the European Central Bank (no additional stimulus) puts pressure on stocks (September)
• Increasing uncertainty leading up to the U.S. election (November) 

In all five instances, the VIX moved up sharply, but in defiance of historical precedent, the volatility index moved down almost as sharply as it moved up.  In fact, some of the biggest extremes for the year came in the form of volatility crushes, where the VIX had an unprecedented series of sharp downward one-day move.  Checking the record books, the only previous year that the VIX posted three top 20 one-day declines was 2007 – and clearly investors were in denial that year.  This year the Trump election caused the sixth largest one-day drop in the history of the VIX, whereas the Thursday before and Tuesday after the Brexit vote triggered the eighteenth and tenth largest one-day VIX declines.

On the other side of the ledger, some of the upward moves in the VIX made the record books as well.  The day following the Brexit vote saw a 49.3% VIX spike – the fifth highest one-day spike on record.  What was even more surprising was the Rosengren/Gundlach/ECB cocktail noted above triggered a 39.9% spike (eleventh highest in history) in what seemed to be a relatively calm market environment in September.  It turns out the VIX was just getting warmed up for greater things, including a record nine consecutive up days leading up to the November election.

Even with these extremes, the highs and lows in the VIX were rather middling, with the VIX peaking at 32.09 on January 20^th and hitting an annual low of 10.93 on December 21^st.

The graphic below captures these and other highlights from 2016:

[source(s): StockCharts.com, VIX and More]

Included in the non-VIX highlights are a 5000+ year low in interest rates in Europe and Japan (where negative interest rates prevailed) as well as a thirteen-year low in the price of crude oil.  On the geopolitical front, political craziness of one kind or another abounded in Brazil, South Korea, Turkey, Italy, Colombia and South Africa, among other locations.  Terrorism also left its footprint again in 2016 and Zika also created considerable political and social turmoil.  In the financial realm, European banks had a very difficult year and begin 2017 on shaky footing.

While the year ended on a relatively quiet not, I suspect 2017 will have much more in the way of new surprises, including swans of many dark hues.  Next week I will resume the VIX and More fear poll and find out what the consensus is for volatility and its causes in the coming year.

Finally, since 2011, I have been maintaining a proprietary Macro Risk Index that measures volatility and risk across a broad range of asset classes, including U.S. equities, foreign equities, commodities, currencies and bonds.  In 2016, the Macro Risk Index was trending down most of the year, punctuated by significant spikes in February (crude oil) and again in June (European currencies). 

How did 2016 measure up to expectations?  I sum up the year in My Low Volatility Prediction for 2016: Both Idiocy and Genius.  Also worth investigating are a pair of Barron’s articles from one year ago laying out two opposing perspectives on volatility in 2016.  For the case for rising volatility and what to do about it, try Jared Woodard’s Prepare for Rising Volatility in 2016.  I provide the contrarian point of view in The Case Against High Stock-Market Volatility in 2016.

Have a happy, healthy and profitable 2017!

Related posts:

• The Year in VIX and Volatility (2015)
• The Year in VIX and Volatility (2014)
• The Year in VIX and Volatility (2013)
• The Year in VIX and Volatility (2012)
• The Year in VIX and Volatility (2011)
• The Year in VIX and Volatility, 2010
• Chart of the Week: The VIX and Volatility in 2009
• The Year in Global Volatility (2008)
• My Low Volatility Prediction for 2016: Both Idiocy and Genius
• VIX Sets New Record with Nine Up Days in a Row
• Top VIX Crushes in History

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

My Low Volatility Prediction for 2016: Both Idiocy and Genius

A year ago, Steve Sears of Barron’s asked me to pen a guest column for The Striking Price and use the opportunity to opine on how I saw the volatility landscape unfolding in 2016.  Without thinking about it too much, I was fairly certain I was going to devote the column to the many threats that had the potential to spiral out of control during the course of the year, but before I had an opportunity to start translating my thoughts into writing, other pundits started weighing in with their predictions for 2016 and without exception, everyone who ventured a guess on the direction of volatility was adamant that volatility would be substantially higher in 2016 than 2015.

Not wanting to follow the herd and always on the lookout for a more provocative point of view, I decided to fade the consensus, rip up the script in my head and adopt a contrarian outlook:  The Case Against High Stock-Market Volatility in 2016.  The column began as follows:

“Looking at all the market predictions for 2016, one thing is certain: Almost all of the pundits agree that volatility will be up, making a bet on rising volatility one of the year’s most popular trading ideas.

But, as is the case with much of the investment landscape, when most of the pundits agree about how the future will unfold, it pays to investigate the contrarian point of view.

As to volatility, the contrarian perspective is particularly compelling for 2016 because volatility is notoriously hard to predict; investors have a habit of dramatically overestimating its future level; and, when it comes to forecasting the causes of volatility, “experts” and investors alike have a penchant for fighting the last war.”

Then came January.  For those who have tried to put it out of their memory, January was one of the worst first months on record, with the S&P 500 Index falling 7.3% for the month.  The bearish trend continued into February, as fears related to China and crude oil had investors selling en masse.  By the time stocks found a bottom on February 11^th, the S&P 500 Index was down 11.4% -- by some measures the worst beginning for stocks in history.  Volatility, of course, was spiking and the VIX had already topped 30.00 on three separate occasions just seven weeks into the year.

My prediction of lower volatility:  complete idiocy.

But the year was not over and we still had to grapple with Brexit, the crazy and unpredictable election season in the U.S., a Fed interest rate hike and persistent political turmoil in places like Italy and Brazil.  Amazingly, stocks showed a tremendous amount of resiliency and all the VIX spikes were given the Whac-A-Mole treatment as VIX mean reversion emerged as a key theme during 2016.

Now that the year is (almost) in the books, it turns out my contrarian low volatility prediction was spot on and the rest of the pundits ended up on the wrong side of a crowded losing trade, assuming one was patient enough to take a full-year perspective.  Genius?  Probably not, but definitely more right than wrong, despite my having to wear a dunce cap for the first two months of the year.

The graphic below shows the annual average VIX and historical volatility going back to 1990.  Note that while the average VIX fell from 16.67 to 15.83 this year, there was an even larger drop in realized or historical volatility, which fell sharply from 15.53 to 13.14.

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

As far as takeaways are concerned, there is the obvious lesson regarding the herd mentality and crowded trades.  Additionally, there are also issues regarding how investors frame a problem or potential problem.  For example, when one expects an increase in volatility they are more likely to be overprepared for that development and/or overreact when there are initial signs of an increase in volatility.  Ironically, if investors load up on SPX puts or VIX calls, then this makes it much more difficult for panic to filter into the market.  This leads to a theme that has been repeated often in this space:  VIX spikes are notoriously difficult to predict and it is also more difficult to anticipate a change in volatility regimes than many believe.

Last but not least, as the graphic above shows, predictions of future volatility almost always overshoot realized volatility, which is why in the last 27 years only the extreme turmoil in 2008 saw realized volatility higher than the VIX over the course of a full year.

As for 2017, when it comes to volatility, expect the unexpected.

Related posts:

• The Case Against High Stock-Market Volatility in 2016 (Barron’s)
• The Case Against High Stock-Market Volatility in 2016 (Guest Columnist at Barron’s)
• VIX Term Structure and VIX Forecasts
• Was the VIX Too Low in 2013? No…
• Violent Disagreement Across VIX Futures
• The Gap Between the VIX and Realized Volatility
• Extremes in the Spread Between the VIX and 20 Day Historical Volatility in the SPX
• VIX Futures: What Were/Are They Thinking?
• Average Annual Normalized VIX Futures Term Structure, 2004-2014
• Revisiting the VIX:VXV Ratio
• The VIX, Lehman Brothers, and Forecasting
• Volatility Aces Bloggers
• What Is Historical Volatility?
• 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

VIX Sets New Record with Nine Up Days in a Row

Over the course of the past few days I have been tracking the slow grind upward in the VIX on Twitter, noting that it had been up seven, eight and eventually nine (as of Friday) days in a row.  As the VIX is a mean reverting animal, I find it interesting that until Friday, the VIX had never risen for nine consecutive days in 27 years of VIX data.  Perhaps even more interesting, during the same period, the VIX had fallen nine days in a row on nine separate instances and even managed to fall ten days in a row on three occasions.  For those who may be wondering, this is yet another data point supporting the idea that VIX mean reversion is more robust following a sharp VIX spike than a sharp VIX decline.

Whenever the VIX makes an unusual move, I am bombarded by variations along the lines of, “That’s nice, but what does it mean for the markets?"  As much as the doomsayers hate to hear this, fear is almost always a great fade, particularly when you have a little patience.  Rather than talking about the matter in theoretical terms, however, I thought I would let some numbers do the talking.  In the table below, I have assembled the fifteen instances in which the VIX has been up at least seven days in a row and have calculated the mean and median performance in the VIX for seven different intervals ranging from one day to 100 days.

[source(s):  CBOE, VIX and More]

Not surprisingly, the mean and median performance of the VIX following these 15 streaks and 1-100 days is uniformly negative.  The data set includes data from Thursday and Friday, which show increases in the VIX and render the one-day performance relatively weak when compared to the rest of the measurement periods.  That being said, mean reversion is evident from the first day all the way through the five-month period that forms the most distant measurement date in this table.

Once again, these findings are consistent with dozens of similar tables presented in these pages over the years that show fading a VIX spike is, on average, an excellent trade opportunity, assuming elevated levels of volatility will persist.

Returning to theoretical territory, if you think about it, what is the type of environment that is likely to cause the VIX to move higher every day for a week and a half or so?  Typically it is event risk in the form of a known event on the calendar that investors obsess about and become increasingly anxious about as it draws ever nearer.  Think of Fed meetings (The VIX and the Pre-FOMC + Post-FOMC Trades), Greece’s elections or key Parliament votes, Congressional votes related to the fiscal cliff, etc.  [See A Conceptual Framework for Volatility Events for more background and context.]

Contrast fretting about the scheduled event risk with something that comes out of nowhere, like the yuan devaluation, Ebola virus, Fukushima, various terrorist incidents and even the Arab Spring.  These dark gray swans blindsided investors and caused a sudden sharp VIX spike – the kind whose steepness cannot be sustained over the course of 1 ½ weeks.

A Twitter reader asked about volatility crushes and their timing.  In a nutshell, a volatility crush is the opposite of a volatility spike and generally happens after a scheduled event is over.  In addition to the macro events listed above, one often sees a volatility crush following an earnings report.  For reasons discussed in A Conceptual Framework for Volatility Events, a volatility crush is much less likely to occur in the context of an unscheduled event with no notice and an uncertain duration.

Today we saw an excellent example of a volatility crush following the announcement by James Comey that the recently discovered batch of emails contained no new evidence in the Hillary Clinton private email server case, reaffirming that there would be no criminal charges against Clinton.  Front month (November) VIX futures are down 12% on this news.

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

Related posts:

• Event Risk, Event Theta and the Next Week
• Guest Columnist at The Striking Price for Barron’s: How to Trade Options Around Volatile Events
• Volatility Becomes Unhinged on Friday
• Fukushima Daiichi and ‘Event Theta’
• The VIX, Lehman Brothers, and Forecasting
• The VIX and the Pre-FOMC + Post-FOMC Trades
• Greek Elections and the Future of the Euro
• Are You Watching Greece?
• Greece, Spain and the Pulse of European Anxiety
• A History of the VIX During Recent Debt Ceiling and Sequestration Battles
• VIX Narrowly Misses New Consecutive Day Decline Record
• Streaking
• Last Two Days Are #5 and #6 One-Day VIX Spikes in History
• Today’s 34% VIX Spike and What to Expect Going Forward
• 2014 Had Third Highest Number of 20% VIX Spikes
• All-Time VIX Spike #11 (and a treasure trove of VIX spike data)
• The Biggest VIX Spike Ever: A Retrospective
• VIX Sets Some New Records, Suggesting Volatility Near Peak
• Highest Intraday VIX Readings
• Short-Term and Long-Term Implications of the 30% VIX Spike
• VIX Spike of 35% in Four Days Is Short-Term Buy Signal
• 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

The Year in VIX and Volatility (2015)

Every year one of my most-read posts is my annotated overview of the year in VIX and volatility.  Now that I have been doing this for the past eight years, the aggregated view of volatility from 2008 to the present makes for a fascinating concise history not just of volatility, but more broadly of the financial markets and of economic activity in general.

The graphic below captures most of the highlights from 2015 and from a volatility perspective, it was a year for the record books.  During August we saw the largest one-week VIX spike (+113%) that resulted from unprecedented back-to-back days of VIX spikes of more than 45%!  The cumulative jump in the VIX pushed the VIX to a high of 53.29 – the only time outside of the 2008-09 financial crisis since the launch of the VIX in 1993 that the VIX has topped 50.

[source(s): VIX and More]

While most investors pointed to China as the proximate cause of the record VIX spike(s), a VIX and More fear poll one week after the big VIX spike also highlighted “market structural integrity (HFT, flash crash, exchange issues, etc.)” as almost on par with China concerns, with “market technical factors (breach of support, end of trend, etc.)” not that far behind.

The balance of the year saw a wide variety of events that moved the markets, including the Fed’s first rate hike in nine years; crude oil plummeting to $34/bbl.; shock waves in the high-yield bond market due to low oil prices; chilling terrorist attacks in Paris and in California; Puerto Rico announcing it will default on some of its debt; turmoil in the currency markets when the Swiss National Bank ended the peg of the Swiss franc to the euro; a dramatic boom-bust cycle in Chinese A-shares – and a flurry of ineffective interventions on the part of the Chinese government to restore stability; a proxy war between Saudi Arabia and Iran in Yemen; and the European Central Bank committing to $1.2 trillion of quantitative easing.

As noted previously, even with all of the volatility, Every Single VIX ETP (Long and Short) Lost Money in 2015.

Finally, since 2011, I have been maintaining a proprietary Macro Risk Index that measures volatility and risk across a broad range of asset classes, including U.S. equities, foreign equities, commodities, currencies and bonds.  In 2015, the Macro Risk Index was consistently higher than it has been during any year since the 2011 inception.

What does high volatility in 2015 mean for 2016?  During the past two weeks, Barron’s published two opposing (but not necessarily inconsistent) perspectives on volatility in 2016.  For the case for rising volatility and what to do about it, try Jared Woodard’s Prepare for Rising Volatility in 2016.  I provide the contrarian point of view in The Case Against High Stock-Market Volatility in 2016.

Related posts:

• The Year in VIX and Volatility (2014)
• The Year in VIX and Volatility (2013)
• The Year in VIX and Volatility (2012)
• The Year in VIX and Volatility (2011)
• The Year in VIX and Volatility, 2010
• Chart of the Week: The VIX and Volatility in 2009
• The Year in Global Volatility (2008)
• Last Two Days Are #5 and #6 One-Day VIX Spikes in History
• China Growth and Market Structural Integrity Top List of Fear Poll Concerns
• Every Single VIX ETP (Long and Short) Lost Money in 2015

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