Captain's Quarters

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VIX Trading - A Fraction Of Its Former Glory

Peter Tchir , Contributor


VIX Is No Longer the Tail Wagging the Dog (Shutterstock)

At their peak, XIV and SVXY, two inverse VIX exchange traded products, had a combined assets under management of over $3.5 billion.

XIV no longer exists and SVXY has total assets of $766 million. Since the leverage has been decreased by 50% from -1 times the daily percentage change in the VIX Short Term Futures Index to -0.5 times, that is really the equivalent of about $38 million of "old" SVXY.

So we have seen a reduction of almost 90% in terms of money invested in short VIX front contracts futures strategies through these products in just over a month.

When SVXY changed its leverage ration, it would have been normal to seen some large fund inflows so investors could keep their same notional exposure to the VIX index it tracked - there was virtually no inflow at all (partially because some brokers have allegedly put restrictions on some VIX ETF and VIX ETN trading).

When I look at the first VIX futures contract, the maximum open interest it had was low. The last time the first contract had such a low "peak" open interest was in late 2016 and you have to go back to 2015 and early 2016 to see such low open interest. This is despite VIX being elevated - which should in theory have attracted more interest.

We don't yet know how the open interest in the second VIX futures contract will behave, but it looks like it is off to a slow start. The VIX ETFs and ETNs both trade a mixture of the 1st and 2nd contract. I suspect we will see much lower "peak" open interest going forward too.

Performance has been questionable as well. The first VIX futures contract closed on February 26th at 16.175 and it closed Friday at 15.775. SVXY, on the other hand, went from $13.65 to $13.23 over that same timeframe. The shape of the VIX futures curve has changed, also hurting flows and performance for the remaining products. It is also interesting to point out that TVIX a double levered long ETN (which should move in the opposite direction on SVXY) closed at $6.82 on the 26th and closed at $6.60 on Friday (yes, a short VIX ETF and a double long VIX ETP both lost money). UVXY, which is now a 1.5 times leveraged ETF (it was reduced from 2 times) went from $13.59 to $13.67 - which at least was a small victory for its holders.

https://www.forbes.com/sites/petertchir/2018/03/11/vix-trading-a-fraction-of-its-former-glory/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix&yptr=yahoo#6a651d874633