Thursday, April 28, 2022

The Latest on VXX and Additional Creation Unit Suspensions by Barclays

It has been 1 ½ months since Barclays announced the suspension of new creation units in the popular iPath Series B S&P 500® VIX Short-Term Futures ETN (VXX).  Today, we received some additional information from Barclays in conjunction with their earnings report. 

In a press release today, Barclays announced that it has suspended new creation units in an 31 Barclays iPath ETNs in addition to the VXX and OIL creation unit suspensions from March 14th.  The full list of ETNs with suspended creation units, sorted by average volume, can be found here, with a top five consisting of VXX, DJP, OIL, GRN and JJN.

Barclays provided some context for what is going on behind the scenes:

“Barclays PLC announced today that Barclays Bank plans to restate the financial statements included in its Annual Report on Form 20-F for the year ended December 31, 2021 (the “Form 20-F”) filed with the Securities and Exchange Commission (the “SEC”) and to amend the Form 20-F to reflect such restatement and to change its conclusions with respect to the effectiveness of its internal control over financial reporting and disclosure controls and procedures.  Because the registration statement and prospectus under which Barclays Bank makes sales of each series of ETNs incorporates by reference the Form 20-F, Barclays Bank and its affiliates cannot continue to make sales under such registration statement and prospectus until the restatement is completed and Barclays Bank files an amended Form 20-F and a new shelf registration statement. Barclays Bank expects to reopen sales of the ETNs when the amended Form 20-F and new shelf registration statement have been filed with the SEC and will make a further public announcement when this action is taken.”

In a nutshell, we are now going to have to wait until we have an earnings restatement for FY 2021 – and the timetable for that is highly uncertain.

In today’s Barclays PLC Q1 2022 Results Announcement release, the company discusses the matter in more detail in the notes section on (original numbering) pp. 29-31 and highlights the following:

“Barclays remains committed to its structured products business in the US and expects BBPLC to file a new shelf registration statement with the SEC as soon as practicable following the amendment of the BBPLC 2021 Form 20-F. For further details, please refer to the notes to the condensed consolidated financial statements accompanying this Q122 results announcement.”

This likely means that Barclays has no intention of shutting down VXX and accelerating the termination at the indicative value price.  That said, the earnings restatement hurdle does not seem like a quick fix, so…both longs and shorts have significant risks (see Further Reading links below for more details) with the VXX premium to its intraday indicative value (IV) (VXX.IV) currently at 13.6%.

Further Reading:
VXX Premium to Indicative Value Falls Slightly to 26%
VXX Upside vs. Downside Risk with No New Creation Units
Barclays Suspends Creation Units for VXX
Attempt at TVIX Short Squeeze Fizzling Out
The Resurrection of TVIX
TVIX Premium to Indicative Value Creeping Back Up
TVIX Creation Units Return; What It Means for Investors
Is TVIX Now Just a More Docile UVXY?
Recent TVIX Volume and VIX Futures Volume
The Story of VIX ETPs Relative to their Intraday Indicative Values
The Ups and Downs of the New Premium in TVIX
Credit Suisse Suspends Creation Units in TVIX: What it Means
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
Who Is Trading TVIX?
Volatility Becomes Unhinged on Friday
TVIX Finally Getting Its Due As Day Trading Rocket Fuel
All About UVXY

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

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

Tuesday, April 19, 2022

SPX Weekly Options Will Soon Be Available with Expirations Every Day of the Week

Yesterday, the CBOE listed the first batch of SPX weekly options with a Tuesday expiration, starting with the April 26th and May 3rd expirations.  Interest is strong, as halfway through today’s session, there were already more than 12,000 contracts traded for just the April 26th expiration.

Readers may recall that the CBOE began to expand from monthly SPX settlements to add weekly Friday settlements back in 2005 and then began to embrace a broader scope of underlying issues with weekly options in 2010, including both VXX and VIX weeklys.  Once the Friday weeklys took off, the CBOE added SPX weekly options that expired on Mondays and Wednesdays.  In the intervening decade or so, weekly options have generated a substantial following, being used for event-specific hedging, short-term trading and day trading.  Weeklys showed their market power when organized retail traders of meme stocks used weekly options to trigger gamma squeezes that dramatically spiked the prices of the underlying stocks.  For more information on this, check out an informative CBOE article, How Meme Stocks Impact Options Trading.

While I am not likely to use this space to advocate day trading weekly options, these options have clearly added significantly to the trading toolbox.  Looking ahead, on Wednesday, May 11th, the CBOE will complete the suite of SPX weekly options, when they list SPX weekly options with a Thursday expiration, likely targeting May 19th and May 26th at the outset.

When this happens, in less than a month, there will be SPX options expiring every day of the week!

The implications for traders and investors are substantial.  You can have options that expire on every day there is an important economic data release, earnings report, FOMC meeting, election, astrological market timing signal or whatever floats your boat.  For those who trade calendar spreads, diagonal spreads or are otherwise interested in fine-tuning the time component of their options expirations, the full suite of weeklys with daily expirations will create a great deal of flexibility in trade structuring, trade adjustment, pricing of positions, etc.  The bottom line:  SPX options expiring every day of the week will introduce a whole new set of opportunities.

What’s next?  Do I hear any votes for hourly options?


[source(s):  LiveVol Pro / CBOE]

Further Reading:
Weekly Options Coming on Strong
What a Difference a Weekly Makes
VIX Weekly Options Coming on September 28
Weekly Options Gain Momentum

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

Disclosure(s): net short VXX and VIX at time of writing; the CBOE is an advertiser on VIX and More

 [source(s):  LiveVol Pro / CBOE]

Thursday, April 14, 2022

UVXY Dominates VIX ETPs By Dollar-Weighted Volume

At various times in the 13-year history of VIX ETPs there have been as many of 30+ different versions of these VIX-based products on the market.  Initially, it was the +1x VXX that dominated the space, later supplanted by the +2x TVIX and then the -1x XIV as the top dog.  All three of these products have run into various issues (see VIX ETPs – What Can Go Wrong?), with XIV dead, TVIX relegated to irrelevance and trading by appointment on the pink sheets as TVIXF and VXX currently wounded by regulatory issues (Barclays Suspends Creation Units for VXX).

In the wake of all this carnage, which products are still viable?  A month ago I would probably have argued that VXX was the most important product in the space, but with VXX’s creation unit troubles, the +1.5x UVXY ETF from ProShares is the clear market share leader, with 63.3% of the dollar-weighted volume in the VIX ETP product space.  The ProShares -0.5x SVXY ETF has the second highest dollar-weighted volume in the space at 19.4% and in third place at 9.8% is the +1.0x VIXY ETF.  VXX from Barclays has fallen to fourth place at 5.8%.  For now, the VIX ETP space is dominated by the ProShares product suite.  The two new kids on the block, the +2.0x UVIX and the -1.0x SVIX from Volatility Shares are gaining some traction, but still have only 0.7% dollar-weighted volume share.

In the graphic below I show the dollar-weighted volume as of yesterday’s data.  Note that the top six products all have a weighted-average maturity of one month while the two laggards, VIXM and VXZ, both have a weighted-average maturity of five months.

 [source(s):  Yahoo, VIX and More]

Further Reading:
UVIX and SVIX Join the VIX-Based ETP Landscape
VIX ETPs – What Can Go Wrong?
Successful Launch for SVIX and UVIX
VIX ETPs Flash Some Green in 2016
Every Single VIX ETP (Long and Short) Lost Money in 2015
Performance of VIX ETPs During the Recent Debt Ceiling Crisis
Expanded Performance of Volatility-Hedged and Related ETPs
Performance of Volatility-Hedged ETPs
Performance of VIX ETP Hedges in Current Selloff
Slicing and Dicing all 31 Flavors of the VIX ETPs
Charting the Assets of the Volatility-Based ETPs

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

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


Monday, April 4, 2022

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:

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

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