VIX ETPs, The Ticking Time Bomb That Could Unleash Volatility

These fairly new ETPs, such as UVXY             , VXX             , SVXY             , etc. will likely lead to volatility buying in which we've never seen before. People will be using these ETFs to hedge the risk of a larger stock market correction happening, leading to a continuation of the exponential increase in volume that these products have seen since their inception. This exponential increase in volume will lead to these ETFs holding the majority of VIX             short-term futures . When these funds are forced to rebalance blindly to follow their prospectus, it will lead to them placing orders at settlement for a number of VIX             contracts that may be higher than the daily volume of contracts traded that day. This will lead to massive slippage in the futures market, causing incredible price swings in both directions. Because these ETPs are forced to buy when price of VIX             futures goes up, and sell when the price of VIX             futures goes down, to maintain a balanced portfolio of 2x, 1x, or -1x respectively. It will lead to a positive AND negative feedback loop as these funds buy or sell futures based on their NAV             readjusting and push the price of futures up or down because of lack of liquidity, which makes their NAV             readjust higher or lower, which forces the funds to buy or sell more futures , which pushes the price of futures up or down, which pushes their NAV             up or down, which forces the funds to buy or sell more futures etc. Once the liquidity risk of the long volatility ETPs becomes extremely significant, like we have just recently saw with the short volatility products ( XIV             , SVXY             , etc.), then the liquidity in the futures market will not be able to support these products and it will cause massive and insane slippage like we've never seen before.

These products did not exist during the last recession, and nobody is really sure how they will act in a real recession like 2008, especially now that their volume is exponentially higher than it was at inception, and could likely continue that trend of increasing for quite sometime, especially if a larger stock market correction occurs, and more investors look to these long volatility products to hedge their risk or make a profit while almost everything else is red. Many are claiming that because some of these ETPs had been shorting volatility on this run up, they had been helping to suppress volatility , which helped to boost the stock market. Now many are quick to blame these products for being the "cause" of the crash this week by increasing volatility . I think that the real truth here is that they did help suppress volatility on the way up, because they sell volatility when volatility goes down, and we've had the lowest volatility in the US since 1964, and as volatility increases, whether it happens now or in the future, these ETPs will help volatility to be unleashed like we've never seen before, because they will buying volatility en masse as volatility increases. These ETPs are not the only cause of volatility , but they will likely be a major factor in helping to create more massive price swings in the VIX             than we've ever seen before, which will either unleash or suppress volatility , depending on which way the trend is going.

The most important part is that the long volatility ETPs such as UVXY             and VXX             , could experience an "acceleration event" like XIV             did, but because they are long VIX             instead of short, like XIV             , this could lead to a massive increase in the NAV             of these Long VIX             ETPs, potentially overnight, as these Long VIX             ETPs become larger and the liquidity risk in the VIX             futures market becomes far more significant. While it's not quite clear that these ETPs have reached critical mass, they will likely continue to increase in volume very quickly, particularly if this stock market correction becomes larger and more investors look to VIX             ETPs as a way to hedge their risk or make a quick profit. This means there is a ticking time bomb in the volatility market waiting to explode.
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do you guys know if there are quotes of a constant 30 days maturity vix on tradingview?
@unelma, I believe $VI1! is the 30 days vix futures. There's also various other futures quotes if you type in vix and look under the futures tab.
Thank you. Can you do a broader economic post (SPX, etc.)
What should we do?
Intuit PRO renkcub
@renkcub, Buying long volatility ETPs like VXX or UVXY will likely be extremely profitable if there is a larger stock market crash/increase in volatility. Though, this strategy is extremely risky and you should expect to lose ALL of your investment due to the rapid decline that these ETPs have experienced historically. This is not a long-term strategy but a way to hedge risk in the short-term. I'd recommend reading the prospectus of any of ETP before investing in it.
@Intuit, thanks for the clarification. Would be great to see some other new posts from you... crypto, gold, SPX...
+1 Reply
primog11 Intuit
@Intuit, Why not just pick up a few VIX call options? Just a thought... My $12 calls on the day of the 1,176 drop in the dow became worth $350 each. I am interested in your thoughts on call and put options on VIX. Personally, I have been riding a straddle on the VIX and the market is currently cooperating well with that strategy.
Intuit PRO primog11
@primog11, Options are a good idea if you have experience trading options. The right calls would certainly be a lot more profitable than just buying on spot if volatility increases. Straddling may be a good way to reduce risk as well, because rarely does VXX or UVXY trend sideways.
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