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Wednesday, December 29, 2010

Is the VXX Due for a Bounce?

VXX is an ETN designed to give equity traders easy access to trading volatility.  Underlying the VXX is the first and second month VIX futures as represented in the SPVSTR index(1).
The VXX has lost nearly 75% this year and recently split 1 for 4 to get the price back up.  Currently VIX futures are in sharp contango making it much more expensive to use the futures contracts to hedge volatility.  This is a negative for the VXX as it must roll the underlying holdings every month before expiration.  Contango has given rise to an ETF strategy of shorting the VXX (futures months 1 and 2) and buying the VXZ (futures months 4 - 7).    
There are indicators of a bounce, however.  First, VXX has seen nearly $500 million in inflows over the last two days(2).  The easiest way to track the money flows is by looking at the number of shares outstanding; VXX shares outstanding has increased by more than 12 million in the last few days.  While the VXX is recently off a 52 week low shares outstanding is putting in 52 week highs indicating that market makers are covering short positions.  Meanwhile, VXZ shares outstanding put in a 52 week high on Monday and nearly 5 million shares were redeemed on Tuesday indicating that long positions are selling.  It looks a lot like the short VXX / long VXZ trade is unwinding.
An increase in shares outstanding for VXX is very bullish and coupled with the anecdotal evidence of the VXX/VXZ trade unwinding could be good for a short term bounce.  Is it enough to fight the January effect?  Only time will tell.
Sources:

4 comments:

  1. Thor,
    A few hundred shares of those $500 million belong to me. Thanks for the great post!
    Ernie

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  2. i do not get this.

    the in-flow does not go back to the etf. it simply changes hands from borrower to a lender of the share. it should not change the share outstanding.

    share-outstanding represents new shares issued by the fund family, ie ipath. when there are more interest to go net long, fund family will buy more underlying and issue more shares to collect management fees.

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  3. i do not get this.

    the short covering does not go back to the etf. it simply changes hands from borrower to a lender of the share. it should not change the share outstanding.

    share-outstanding represents new shares issued by the fund family, ie ipath. when there are more interest to go net long, fund family will buy more underlying and issue more shares to collect management fees.

    ReplyDelete
  4. It is easier to create shares to cover large short position rather than buy shares in the market. When I borrow shares and sell them short I have no effect on shares outstanding. When I then create shares to cover my short position I am increasing the number of shares outstanding by the size of my short as the ETF sponsor is creating shares that go to cover my short.

    ReplyDelete