With the S&P 500 index down 8.76% in October we would expect the CBOE Volatility Index (VIX) to increase dramatically, and it didn’t disappoint, rising 75.17%. Trading in the “Fear Index”, which measures the implied volatility of near term S&P 500 option premiums, can be done via futures, options or ETPs. The most popular VIX ETP being the iPath S&P 500 VIX Short Term Futures ETN (VXX) with a market cap of $929 million and short interest of $1.62 billion.
Even as the VIX ETPs stock prices moved along with the gyrations of the VIX Index, the VXX was up 40.4% for the month, traders began to adjust their holdings throughout the month in anticipation of future moves and possible reversals. The twelve most active VIX ETPs saw $927 million in outflows in October, slashing 24% of their total market cap. On the other hand, short sellers nearly doubled their short exposure to the VIX ETPs, adding $1.25 billion in new short exposure during the month.
VIX short sellers were adding to their positions even as they incurred mark-to-market losses throughout the month. The VXX ETN was up 40.4% in October and short sellers were down $341 million in mark-to-market losses. In total, mark-to-market losses over the 12 VIX ETPs was $480.3 million, a negative return of -25.8%.
The twelve VIX ETPs provide both long and short exposure to the VIX, as well as different levels of leverage. To measure the true Bullishness/Bearishness of VIX ETP trading activity we need to take into account these different levels of exposure by multiplying the ETP leverage by Fund Flows and Change in Short Interest.
On September 30th, ETP long and short holders had a Bull/(Bear) exposure of $3.31 billion and by the end of the month their Bull/(Bear) exposure had dropped to $361 million, a Bearish move of ($2.84 billion.) Investors had been long going into October and took advantage of the surge in the VIX index, but by the end of the month their bullishness had virtually evaporated and, in aggregate, it looks like VIX traders are looking for the VIX Index to stay at these levels for the short term.
If long VIX ETP shareholders continue to reduce their positions and shorts continue to accumulate theirs, we may be looking for the VIX index to trade back down and get closer to its year–to-date average of 15-16. If the VIX index does decline, volatility would have to have decreased significantly, which would bode well for possibility of a year-end equity rally.
Research Note written by Ihor Dusaniwsky
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Managing Director Predictive Analytics, S3 Partners, LLC
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