Thursday, February 25, 2021

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

Wednesday, February 3, 2021

Attempt at TVIXF Short Squeeze Fizzling Out

Amidst all of the market turmoil following the Reddit wallstreetbets efforts to put a massive short squeeze on the likes of GME, AMC, BBY, EXPR, KOSS, BB, etc., it was just a matter of time before this same short squeeze template was applied to ETPs.  On January 28th, silver became a short squeeze target and the primary silver ETP, SLV, was suddenly in the crosshairs and trading volume spiked about 10x.

On Monday, the OTC remnant of the venerable TVIX ETN, delisted by Credit Suisse on July 12, 2020 and now trading under the TVIXF ticker, became the target of yet another copycat short squeeze effort.

Yesterday, Yacob Peterseil of Bloomberg summarized the developments in the TVIXF short squeeze attempt in the aptly titled, A Onetime Giant of Volatility Has Gone Haywire in OTC Trading.  Peterseil noted that only 7% of TVIXF’s outstanding shares have been sold short, which dramatically limits the potential success for a short squeeze.  In the article, I am quoted as not being surprised that an attempt was made to squeeze the TVIXF shorts given the success of previous short squeeze efforts, but I also note that an effort to squeeze the shorts is very risky for longs in that the last time there was a similar undertaking, Credit Suisse declared an acceleration event and crushed the longs.  It is the risk of an acceleration event that forces the price to the indicative value (IV) – a feature that is unique to ETPs and does not apply to single stocks – that makes shorting ETPs much riskier.

The historical reference above is to DGAZF, which went from about 400 to about 25,000 in one week during a short squeeze in August 2020 when the indicative value was near 200.  The decoupling of the market price on the OTC from indicative value was in large part due to the cessation of the ability to generate new creation units and thus the ability to use shorts to arbitrage any difference between the market price and indicative value.  With large losses incurred by investors and the associated bad publicity, Credit Suisse elected to accelerate DGAZF.   As noted above, the acceleration of the note was executed at the indicative value price, not the market price:  “As described in the Pricing Supplement, investors will receive a cash payment per ETN equal to the arithmetic average of the closing indicative values of the ETNs during the accelerated valuation period.”  As a result of the acceleration to the indicative value, investors who saw DGAZF trade at 125x its indicative value were exposed to a 99.2% loss.

Not surprisingly, the TVIX prospectus and pricing supplement has essentially the same language regarding acceleration at indicative value as DGAZ, with the pricing supplement noting no less than a dozen times that in an acceleration event, the redemption price reverts to indicative value rather than the market price. 

If some of this talk of short squeezes, premium to indicative value and suspension of creation units sounds familiar, this is not the first time it has happened to TVIX.  I covered the initial instance of the suspension of creation units in TVIX at length back in 2012, when most investors were still not familiar with the intricacies of indicative value, creation units, the potential for short squeezes and the potential for market prices to decouple dramatically from indicative value.

In the graphic below, I show the recent uncoupling of TVIXF from TVIX.IV (TVIX’s indicative value) and the premium that has developed as a result of the short squeeze peaking at 44% on Monday and falling back to 29% as of today.  The key takeaway for longs is that at any point in time, Credit Suisse can do as they did with DGAZF and declare an accelerating event, forcing the distorted OTC market price back down to indicative value in a hurry.

[source(s):  Yahoo, VIX and More]

Further Reading:
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): none

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