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How VIX ETFs Help To Crush Vol And Ramp Risk Every Day

Tyler Durden's picture




 

There are underlying options on the S&P 500 that trade on exchange or OTC (depending on size and strike and margin package - arb or outright). On top of that set of options lies a world of futures and options on a 'created' VIX (that are predicated on the implied vols of the underlying S&P options). And to top it all off - the wonderful world of Exchange Traded Products (ETPs) overlays various levered and unlevered short and long products for retail (and professionals) to speculate on (and some have their own compound options). As you can tell - there is a large amount of 'flow' impacting up and down the chain in this vol landscape.

Barclays has found that that flow - when aggregated across all the instruments accounts for around $5.3mm notional of selling volatility day after day in flow that needs to be pushed down through the underlying markets. This is just by construction in the way the ETPs are created.

This is why your position in say VXX decays. So while its easy to blame Kevin Henry, he is getting a solid leveraged hand from the 'other side' of hedgers rebalancing their ETP exposures. And at current levels, it appears demand is high for protection (which perhaps explains why stocks are not dropping as one would suspect they should).

The following table sums up all the VIX-related products and the final two columns show the 'flow' that theoretically has to move to the underlying options day after day...

 

and it seems in the run-up to the fiscal-cliff to now, open-interest in VIX futures has surged... but appears to have stabilized for the last week or two (even as stocks pushed on higher)

 

and of course the massive net short in VIX futures (commitment of interest) has pressured Equity vol even lower - to the point at which it is at 5-year lows relative to credit vol and we suggest warrants some further investigation for a long equity vol vs short credit vol trade...

 

So while this 'flow' will pressure vol and ramp stocks implicitly as market-maker algos hedge away, there is a limit and maybe (on a relative basis) that limit is close... especially to credit

Charts: Bloomberg and Barclays

 

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Wed, 02/13/2013 - 18:58 | 3241430 ebworthen
ebworthen's picture

So how long before we have Treasury ETF CDS's being re-hypothecated to CALPERS?

Wed, 02/13/2013 - 19:48 | 3241521 Dealer
Dealer's picture

No risk of that.

Wed, 02/13/2013 - 18:58 | 3241431 camaro68ss
camaro68ss's picture

Whens this market going to hit snake eyes?

Wed, 02/13/2013 - 19:02 | 3241438 EscapeKey
EscapeKey's picture

a saturated market, with very low barrier to entry (if you discount lag). was always bound to see lower yields.

perhaps the programmers will now have to *gasp* spend their time on something productive instead.

Wed, 02/13/2013 - 19:35 | 3241502 PUD
PUD's picture

Ah yes..."investing" Putting your hard earned capital into productive ventures..."investing" in America! The "capital" markets where grandma "puts her money to work" skimming and scamming invisible cyber digits all under the rational and prudent thesis of building a better country. The FIRE economy at its best! Establishing a bedrock of sound future building for our children and grandchildren. "investing" What a carnival cruise line pant load of shit! It is nothing but a casino. A sophisticated, dysfunctional, criminal, irreverent, irrational, delusional, sociopathic playground for the soulless, greedy and criminally insane.

Wed, 02/13/2013 - 19:42 | 3241511 gratefultraveller
gratefultraveller's picture

OT... Another couple of days, and the US Mint will have sold as many Eagles as in Jan-Mar 2012

Steady as she goes, Cap'n

Wed, 02/13/2013 - 20:41 | 3241602 FreeMktFisherMN
FreeMktFisherMN's picture

I figure I might as well 'diversify' 'intra-Ag' and not just buy eagles and maples, so I bought all the wildlife RCM ones (including the 1.5 ozt. polar bear) and also have been picking up the Littleton showpak country coins off of ebay. Littleton is literally absurd how much if you go on their website for just ASEs, but they used to have the showpak coins and I have at least one from Mexican Libertad, Australian Kook, Somaliland, Mongolian, Kwacha, Romania, and Austrian Kreuzer. 

I do think a lot about numismatic plays, and wonder if when silver takes off say the RCM timberwolf will go up accordingly from its current roughly $55-60 value. 

Wed, 02/13/2013 - 19:54 | 3241530 beaker
beaker's picture

Fuck. After 36 yers and retired from Wall Street, i thought I understood all this shit.  This is getting so far removed from reality I cant follow it anymore.  Especially after 3 Wild Turkeys.

Wed, 02/13/2013 - 20:48 | 3241612 Downtoolong
Downtoolong's picture

$5 of derivatives based on every $1 of underlying.

Moral hazzard? Naah, we're a self regulating industry.

 

Wed, 02/13/2013 - 23:00 | 3241955 Whiner
Whiner's picture

Free markets, regulatory capture, Bitchezs! Get used to it!

Thu, 02/14/2013 - 00:38 | 3242191 WTF_247
WTF_247's picture

Theoretically, if insurance is cheap enough everyone of the big funds can just purchase that and never sell stocks.

The kicker is if the "insurance" is good.  They will sell vol til the cows come home - a shock event may prove buyers to be the fools as there is no money to back the sellers.  This is no different than the retards who were massive sellers of out of the money puts before 1987 - a good business until you lose 1000%+ in 1 day and are bankrupt.

If the sellers of vol cannot come up with the margin, they are closed out at market - but this does not necessarily mean that the buyers will be able to sell either.  You can have a situation like AIG where the only source of bailout is the govt.  It worked once, not sure it will work again unless the sellers are JPM, C, GS and the gang.

Fri, 02/15/2013 - 17:55 | 3247888 The Econ Ideal
The Econ Ideal's picture

The VIX futures curves are still in contango with the front months getting shorted. So the sucker thinks buying hedges on their portfolio is running cheap. It isn't. 

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