This Week in VIX Scaremongering

Thu, Mar 8, 2012 | Jared Woodard


The halt in TVIX share issuance and the fact that, on some days, VIX-based ETF/ETN rebalancing accounts for 90% of VIX futures volume has caused some pretty wild speculation. I’ve been too busy this week to write a proper rebuttal, but here are some points that will help you steer clear of all the needless hand-wringing:

  • The rolling of contracts in VXX and similar products is in no way “entirely game-able,” for the same reason that the term structure of implied volatility in SPX options is not gameable. If the values of VXX shares, VIX futures, or SPX implied volatility is high, that’s because of customer order flow, not because ETN issuers have somehow broken or even altered the market. VXX has a negative roll yield, as is well understood, and if you pursue constant long volatility exposure with a short time horizon in any equity index options product, you’ll pay a similar cost. Volatility arbitrage stragies, where they exist, exist because of structural features of markets and the psychology of market participants, not because some ETN became popular.
  • The supply of crude oil is poignantly finite, and someone with a big enough futures position might be able to affect the market. The supply of long SPX volatility exposure is, for our purposes, practically infinite. So proposing position limits in VIX futures doesn’t make any sense. We might as well limit the number of shares of SPY people can buy.
  • The fact that customer order flow is on the long side of volatility and that ETN issuers are constantly hedging short vol exposure is a good thing. Well-hedged retail investors are better than panicking, unhedged retail investors, and dealers can take care of themselves well enough, as Credit Suisse demonstrated in February with TVIX.
  • For some reason, the folksy, y’all-be-careful-now tone of this article really irks me. The VIX is not such a “curious beast” once you’ve spent a little time with it. Can we please treat investors like the adults that they are? Seriously: ”The answer, it turns out, is that any rational investor would look at the VIX futures market and run away screaming.” No, rational investors do not scream and flee from the existence of liquid, actively traded volatility derivatives.

When information about products most investors don’t understand anyway gets mixed in with a lot of exclamation points and arch rhetoric, it does nobody any favors. Cf. the public perception of OTC swaps and derivatives.

Vance Harwood has written up a very careful and thorough review of this question about the market impact of volatility ETPs, and you should click through to his piece for more details. I couldn’t agree more with his conclusion:

 I understand that shifting $50 million or more a day to rebalance an ETN with a billion dollars in assets is not a trifling thing, but compared to the $10 trillion market cap of the S&P 500 this feels like a tempest in a teapot.

1 Comments For This Post

  1. Eric Hale Says:

    We all know that the VIX is calculated by the pricing of the OTM SPX options. The spot VIX cannot be traded because it is not too difficult to swing the VIX by placing strategically placed trades on OTM SPX options.

    VIX futures are set by the market. They are supposed to be representative of the markets future forecast of the VIX. However, they are correlated to the OTM options pricing for the out months in the VIX. Therefore, they can be indirectly affected by large strategically placed trades on those OTM SPX options.

    Personally, I cannot understand why anyone would want to trade the VIX (futures, options, ETNs, etc.) It is a very complicated instrument. Plus, where do you get quotes or charts of the VIX futures? Most retail traders do not have access to that. Why would you trade something that you cannot easily see a quote or even a chart?

    Either they are extremely intelligent or they… are not.

    An executive from a very well know broker told me that the VIX is the single equity that has caused the most losses for his retail clients. There are just too many other things out there to trade without the mess that is the VIX. It’s not made for retail traders.

    I’m just sayin’…

2 Trackbacks For This Post

  1. Thursday links: seismic shifts | Abnormal Returns Says:

    [...] the $VIX is different than other “commodities.”  (Condor Options, Six Figure [...]

  2. Are Volatility ETPs Like VXX and TVIX Going To Kill the Market? | Condor Options Says:

    [...] consequences on the market has been a popular theme for a month or two now at least. I’ve tried to show why this this idea doesn’t make sense twice; when it comes to zombie ideas, sometimes you have to just keep [...]

Leave a Reply


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


Open All | Close All