VXX Premium to Indicative Value Falls Slightly to 26%

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

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

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

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

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

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

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

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

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

[source(s):  TD Ameritrade]

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

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

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

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

Point Hedges ETP Performance During Invasion of Ukraine

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

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

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

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

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

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

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

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

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

[source(s):  StockCharts.com]

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

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

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

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

Flight-to-Safety ETP Performance During Invasion of Ukraine

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

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

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

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

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

[source(s):  StockCharts.com]

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

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

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

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

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

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

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

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

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

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

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

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

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

Disclosure(s): none

VXX Upside vs. Downside Risk with No New Creation Units

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Barclays Suspends Creation Units for VXX

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Further Reading:

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

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 28^th, 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

Performance of the VIX in the Two Weeks Before and After Presidential Elections

A convergence of concerns related to stimulus, elections, COVID-19 and earnings (courtesy of a big SAP earnings miss) caused the VIX to jump 17.8% today.  How much of that was related to the election?  Well…the 9-day VIX9D spiked 47.8% today, now that the election is within the 9-day measurement window for the first time.  The bottom line is that election uncertainty and anticipated volatility is currently a huge factor in the mindset of the investor.

This raises the question of how jumpy the VIX tends to be in advance of elections and what happens after the election.  If you know anything about what happens to the VIX around FOMC announcement days, you will find considerable similarities when it comes to elections.  Specifically, the VIX responds to the upcoming event risk by increasing steadily into the event, dropping sharply on the day of the event and declining even more as the event recedes in the rear-view mirror.

Of course, most think this election is different.  While that is certainly true, all elections are unique in their own way and yet the same general principles apply.

Note that in the graphic below I normalized all the VIX readings from 1992-2016, with the exception of 2008, which just happened to fall at the height of the Great Recession, so the 2008 data is excluded, as it would otherwise skew the results.

 

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

Further Reading:
The VIX and the Pre-FOMC + Post-FOMC Trades
VIX Trends Around FOMC Announcement Days
VIX Price Movement Around FOMC Meetings
Post-Election Risk Trending Up in Treasuries and the Euro, Down in U.S. Stocks
VIX Sets New Record with Nine Up Days in a Row
Top VIX Crushes in History
How to Trade Options Around Volatile Events (Barron’s)
A Conceptual Framework for Volatility Events
Volatility During Crises
Fear Poll: Fiscal Cliff Fears Spike, Concerns About Excessive Central Bank Intervention Rise
Fiscal Cliff Worries Grow As Election Nears
The Hollande Discount
Chart of the Week: Intrade and the Midterm Elections
Chart of the Week: Intrade and Control of the House of Representatives

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

Disclosure(s): none

Updating the Current VIX-Based ETP Landscape

There is a lot going on in the markets, with several themes weighing on volatility or the potential for more volatility.  COVID-19 cases are spiking to new highs in Europe and the U.S. and could be at an inflection point in the U.S.  Election uncertainty is also unnerving investors with the election only nine days away.  Lasts and not least, markets are strongly influenced by the Pelosi-Mnuchin stimulus dance, which appears to have migrated from a tango to a polka – but at least the music is still playing.

In the time since I was a regular contributor in this space, a lot has happened in the volatility world and the VIX ETP space has also changed dramatically.  For this reason, it seems like a good time to update a favored VIX ETP graphic to reflect the many products that have closed, matured and been moved to the pink sheets.  In keeping with tradition (this graphic has been published many times in various incarnations since 2010), I have plotted all of the VIX ETPs with respect to their target maturity (X-axis) and leverage (Y-axis).

It has taken more a decade, but the bottom line is that the VIX ETP space has essentially been narrowed down to two dominant products:

VXX (iPath Series B S&P 500 VIX Short-Term Futures ETN) – the pioneering +1 long volatility ETN that launched back on January 30, 2009 and has been the dominant product in the VIX ETP space throughout its lifetime

UVXY (ProShares Ultra VIX Short-Term Futures ETF) – the +1.5x ETF that spent most of its life as a +2x product and moved to +1.5x following the February 2018 Volmageddon event which resulted in the termination of XIV

Both VXX and UVXY trade an average of over 30 million shares per day and both are regularly in the top 5-10 highest volume ETPs as well as ETP options volume leaders.  The remaining VIX ETPs have been largely relegated to niche product status.  Additionally, Credit Suisse delisted and suspended its VelocityShares ETNs, meaning that the former TVIX, VIIX and ZIV now trade in the OTC market under the symbols TVIXF, VIIXF and ZIVZF.  For this reason and because of low liquidity and the increased risk with trading on the OTC “pink sheets.” I have highlighted these tickers in red.

[source(s):  VIX and More]

Further Reading:
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 and UVXY at time of writing

Looking at Coronavirus Cases per Million, by Country

Further to yesterday’s Coronavirus (COVID-19), post, Tracking the Trajectory and Peak of Coronavirus Cases, I want to make sure we are thinking not just in terms of the absolute number of confirmed cases, but also cases per million. 

The graphic below highlights the countries which have been hit hardest on a per capita basis.  Using this criterion, Iceland is the country where the coronavirus is most prevalent, followed by Italy, South Korea, Iran, China and Switzerland.  These six countries stand out as having passed an inflection point.  Given the data out of Western Europe in the past 48 hours, it appears as if Spain, Sweden, France and Denmark are not far behind.  The U.S. currently ranks 41^st in terms of cases per million, with just 1/100^th of the penetration in Iceland.

[source(s):  Wikipedia, VIX and More]

Assuming the distribution of new cases continues to trace a parabolic path, being able to reasonably estimate the terminal penetration rate – which will no doubt vary by country – could help to set expectations about the progress and timeline of new cases.

Finally, to follow up on yesterday’s post, I am now dating the first day of 100 new cases in the U.S. at March 7^th.  Using the 8-14 day window for 100 new cases to peak new cases means the U.S. could see peak new cases in the March 15^th – March 22^nd time frame, with an outside shot of the peak extending out to March 29^th.  Of course, this projection are merely an extrapolation from the experience in other countries and will be largely dependent upon the rate at which testing is ramped up in the U.S.

Further Reading:

Tracking the Trajectory and Peak of Coronavirus Cases

Volatility During Crises

Forces Acting on the VIX

A Conceptual Framework for Volatility Events
Bird Flu Stocks and Volatility
VIX Sets New Record with Nine Up Days in a Row
Fear Poll: Fed/QE, Ebola and Technicals Top Worry List

HOGS Gets Slaughtered

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

Disclosure(s): none

Tracking the Trajectory and Peak of Coronavirus Cases

I have seen a lot written about the Coronavirus, a.k.a. COVID-19, but I have yet to see any informed discussion about the trajectory of cases in various regions, the cycle time to peak new cases or meaningful predictions about the future course of the spread of the virus.

So here are some thoughts on the subject, using historical data from Wikipedia that is more standardized in time and collection methodology than any other data I have been able to find on the Web.  First, I examined the entire history of case data by country and found inflection points that roughly correspond to 10 new cases and 100 new cases per day.  As identification of initial cases is somewhat problematic given the variable protocols for testing, availability of testing kits, timing of nearby positive cases, etc. I elected to use the 100 new cases per day threshold.

It turns out that there have been seven countries so far that have logged 100 new COVID-19 cases in a single day.  In order of reaching that 100 new cases threshold, they are:  China (January 21^st), South Korea (February 21^st), Italy (February 26^th), Iran (February 27^th), France (March 5^th), Germany (March 6^th) and Spain (March 6^th).  The U.S. has come close to the 100 new case threshold and may indeed hit that mark today or tomorrow.

The graphic below shows the daily number of new cases in each of the seven 100+ new case countries.  Note that it is reasonable to expect some sort of parabolic pattern for new cases with a steep jump in new cases that eventually flattens out, peaks and declines in a similar fashion.  This pattern probably would have been the case in China, except that on February 10^th, China changed the methodology for counting new “confirmed” cases from relying strictly on the basis of a positive result from a lab testing kit to cases that included patients where CT scans for pneumonia allowed for a “confirmed” case clinical diagnosis for likely COVID-19 cases without having to wait for a lab test and results.

[source(s):  Wikipedia, VIX and More]

To summarize the data in the graph, three of the four countries that are at least ten days from the initial 100-case day have seen what appears to be a peak in new cases.  In China, it was 22 days from 100 cases to peak new cases, though it is possible that peak new cases might have been 14 days if China had not expanded the methodology for defining new cases to include a clinical diagnosis.

In South Korea, a concerted effort to ramp up testing as quickly as possible is probably responsible for the fact that South Korea saw a peak in new cases just 9 days after the first 100-case day.

While the peak in new case data in Iran should be considered provisional, the current peak in new cases was only 8 days after the first 100-case day, perhaps aided by the steep trajectory in new cases during the first five days.

Italy is the outlier in that there are no signs of a peak some ten days after the first 100-case day, though it is reasonable to expect that the newly implemented national lockdown and public gathering measures will help to slow the rate of new cases going forward.

The remaining three Western European countries – France, Germany and Spain are only 3-4 days into their post-100 timeline, so it is too early to talk about a peak.

The first quick takeaway is that the time from 100 new cases to peak new cases seems to cluster around 8-14 days or perhaps 8-22 days if you overlook the changes in the methodology for counting new cases in China.

Second, with the U.S. new case count hovering just below 100, it is reasonable to expect that the 8-14 day window for new cases will also apply to the U.S. putting a likely peak count in the March 17^th – March 24^th time frame, with an outside shot of the peak extending out to April 1^st.  This assumes, of course, that the U.S. follows a similar trajectory to the other countries.  Along those lines, it will be interesting to see if Italy’s new cases peak during the next week.

Obviously, there are a number of factors that can affect how successful a country can be in containing the COVID-19 outbreak, conduct an appropriate number of tests and other factors. Japan, for instance, had its first case almost two months ago and has yet to approach 100 new cases in a day.

More to come on the COVID-19 global outbreak, the VIX, volatility and more.

Further Reading:

Volatility During Crises

Forces Acting on the VIX

A Conceptual Framework for Volatility Events
Bird Flu Stocks and Volatility
VIX Sets New Record with Nine Up Days in a Row
Fear Poll: Fed/QE, Ebola and Technicals Top Worry List

HOGS Gets Slaughtered

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

Disclosure(s): none