Demand for VIX ETNs surges as traders and investors price fear into the marketplace.
VIX is the Chicago Board Options Exchange Market Volatility Index and measures the implied volatility of S&P 500 Index Options. It’s commonly known as the “fear index” and tends to rise as stock and ETF prices fall. It measures the option market’s expectations of volatility over the next 30 days.
Demand for VIX ETNs has been so intense in recent days that on Tuesday, after the market close, Credit Suisse, the issuer of VelocityShares Daily 2X VIX Short Term ETN, (NYSEARCA:TVIX) stopped creating shares in the highly popular exchange traded notes.
Credit Suisse is the second biggest bank in Switzerland and the sponsor of TVIX which has exploded in volume and assets to more than $690 million, growing by four times in size so far this year.
How long the suspension of new shares will last is unknown, but current holders can continue to redeem their shares.
VelocityShares VIX product (NYSEARCA:TVIX) is a double leverage ETN that seeks to track the VIX Index and double its rate of movement, up or down.
Credit Suisse said that the suspension of issuing new shares was “due to internal limits on the size of the ETNs” which would indicate that Credit Suisse has reached the extent of maximum exposure they’re willing to undertake in this product.
How this action will affect the price of volatility ETNs is unknown as risk premium may increase as VIX bulls try to capitalize on a short squeeze as demand could outstrip supply for VIX ETNs. Any price premium could also quickly evaporate if/when Credit Suisse begins reissuing shares which would put VIX bears in position for potential gains. The opposing view is that the suspension on new shares in TVIX will reduce demand for VIX futures and so VIX may decline.
A single leverage VIX ETN, Barclays iPath S&P 500 VIX Short-Term Futures ETN, (NYSEARCA:VXX) has also experienced a surge in volume as traders bet that the volatility index is going to rise in coming months, pushing assets under management to near six month highs.
Basic price movement in VIX and VIX ETNs is generated by volatility and traders are betting that volatility is likely to increase, perhaps due to events in Europe or the fact that the major U.S. indexes remain at significantly overbought levels.
VIX ETNs declined today with iPath S&P 500 Short-Term Futures ETN (NYSEARCA:VXX) declining 6.5% and VelocityShares VIX (NYSEARCA:TVIX) dropping 5.3%, while VelocityShares Daily Inverse VIX Short Term ETF (NYSSEARCA:XIV) a volatility ETN that moves inversely to VIX, added 6.5%.
Bottom line: VIX is trading well below its long term average and near significant support levels that have not been breached since the summer of 2007 before the onset of the financial crisis. With markets in overbought condition and VIX futures in high demand, the possibility for higher VIX and VIX ETN prices, along with correspondingly lower stock prices, remains high.
Disclaimer: Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.