Barclays Bank Sign VXX Oil Suspension

VXX: What Does Barclays VXX, Oil Suspension Mean?

By:Michael "Dr. Data" Rechenthin

VXX vs VIX: What Are the Differences?

The VIX spikes when anxiety increases; it is a “fear” index. How is it created? It measures a combination of volatility on strikes that are out-of-the-money. So, everything else equal, as option prices increase, this increases the level of implied volatility in the option, which in turn increases the VIX.

So the VIX is the real-time “cash” index of the implied volatility in the S&P 500 “cash” SPX.

Line graph of SPX and VIX (index of implied volatility in S&P 500)

But the VXX is a “short-term volatility index”. What does that mean? The VXX measures the short-term volatility of the VIX. This means it is a measurement of the front two months of the futures, and in particular, an index of many VIX futures (/VX) composed mainly of shorter-term VIX futures.

If you look at the VIX overlaid with the VXX, it is very correlated. Barclays tries to do reverse splits so that it even tracks around the same price as the VIX. Keep in mind though, over time, it will eventually go to near 0 – VXX is not a good long-term product to buy-it-and-forget it.

Line graph of correlation between VIX and VXX (short-term volatility index)

Right now, the VIX curve (/VX) futures curve is backwardated, meaning the front is more expensive than the back months:

VIX futures (/VX) forward curve

So when Barclays announced they would suspend the creation of new units of the short-term VXX, it essentially “broke” and began to act more like a closed-end mutual fund. The process that Barclays used to keep VXX in-line with the “short-term” VIX was no longer occurring. First, it rose due to the price going to the front month of the VIX futures +/- any tracking error. It then overshot, due to massive amounts of short-interest covering positions (i.e., short-squeeze) which drove up the price even further. The exchanges then sent VXX to a halt multiple times during the day. It is still probably too rich.

The intraday run-up Tuesday to 40 shows how little people know about this product and its pricing. Hence another reason to stay away from this type of “exotic” ETN.

To trade index futures and other ETNs open an account on tastytrade.

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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