zerohedge.com / by Peter Tchir via Brean Capital / Oct 31, 2016 11:52 AM
Is the VIX Curve Too Flat?
For the last couple of weeks, VIX and VIX based ETFs and ETNs (UVXY, TVIX, VXX, XIV, etc) have only been on the fringe of radar screen. They were there, but they were only mildly interesting.
What I had noticed at the time was:
1. VIX ETPs were seeing shares outstanding increase as VIX dropped (doubling down)
2. Then last week as VIX was rising I commented on the fact that funds were not seeing large decreases in shares outstanding – a signal that the ‘hedgers’ were prepared to be resilient
3. Over the past few days I have had more and more discussions about VIX again and think the one thing worth pointing out for those who like to dismiss it as a ‘pure retail’ product is that UVXY alone has about 25% of the outstanding Nov VIX Futures contracts and almost 30% of the outstanding Dec VIX Futures contracts. That is a large percentage of any market – let alone one where the product doubles down on direction each night to maintain its leverage balance. It has a market cap of $800 million, but since that is 2x leveraged that represents $1.6 billion of VIX exposure. VXX is unleveraged and seems about 6 to 8 times as volatile as the S&P 500 in terms of realized vol. That to me, means UVXY controls roughly $10 billion of S&P 500 equivalent risk – less easy to dismiss – especially given the daily volumes, the outsized ownership of the futures and the overall complexity of the product.