As VIX Explodes, A Painful Warning: The Vega Of VIX ETFs Has Never Been Higher

Tyler Durden's picture

With the VIX soaring, from single digits yesterday to over 15, risk is suddenly breaking out above the crucial Kolanovic redline level...

And Nasdaq is tumbling.

... it is worth reminding readers just how coiled the short-vol sector is, something we described two weeks ago in "If The VIX Goes Bananas" This Is What It Will Look Like" and in which a Morgan Stanley trader detailed how a devastating short vol unwind might develop:

A violent rise in volatility could be driven by just a 3% to 4% one-day S&P 500 selloff.  Right now the risk is greatest in the VIX complex, and demand for VIX futures from three main sources could result in 100,000 contracts ($100mm vega) to buy in a down 3.5% SPX move.  For context VIX futures ADV over the last year is 230,000 (although has risen to as high as 700,000 in big selloffs).

As MS' Chris Metli further explained, should the S&P fall 3.5%, "first, the VIX could rise as much as 12 points.  When volatility is low it tends to move a lot for a given change in the S&P 500.  That effect is likely to be exacerbated now because a) skew is steep (and VIX rolls up the skew in a selloff) and b) many players in the VIX market are short.  Taking these dynamics into account QDS estimates VIX could rise ~12 points for a 3.5% 1-day decline in SPX."

He also notes that If the VIX rises 12 points, 1-month VIX futures are likely up 5.5 points, a ~50% increase.  The 1-day percentage change is a big deal in the VIX complex because the levered and inverse VIX ETFs and ETNs rebalance daily based on the percentage change, and some of the thresholds for forced unwinds are based on the percentage change. 

This is the forced deleveraging scenario, where surging VIX forces vol sellers to unwind, and buy more VIX, creating a feedback loop, that Jeff Gundlach envisioned earlier this week.

As we noted yesterday, there has never been more trades placed on VIX.


And short volatility bets have never ben higher.

And just to get a sense of how massive the potential unwind could be, here is some additional data from JPM which reminds us that the Vega of VIX related ETFs adjusted by short interest has never been higher.

in Figure 4 which is provided by our Equity Derivatives Strategy team and which uses a more sophisticated calculation to estimate the net vega, i.e. sensitivity to each percentage point change in vol, for the total universe of VIX related ETFs adjusted by their short interest. This vega stands at historical high levels currently.

This means that once the VIX buying cascade begins in earnest, stopping out thousands of vol-sellers, nobody really knows when and how it will end.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Yars Revenge's picture

Vix Etfs are garbage. Avoid!

Honey-Badger's picture

Yup good spot to go short if it wasn't totally and utterly rigged.

thesonandheir's picture

It just broke through the declining trendline from Jan 2016.

Honey-Badger's picture

Already got spanked from 15.00 back down towards 14.00, will be back to 11.00 by EOD Friday.

Bill of Rights's picture

Must be nice to have all the answers with this sort of accuracy you must be a millionaire many times over.

Honey-Badger's picture

I don't play at the casino anymore, on a long enough timeline the house always wins.

sickavme's picture



When the nasdaq starts dropping 500-800 points a day, then I will start shorting my load...


Otherwise, trumps words followed by nothing else is little cause for alarm... 2 B2 bombers running around in circles for a day means zip(although they are some sexy aircraft)...

americhinaman's picture

the analyis for this article ignores the fact that vix etn buyers ALWAYS sell when vix increases... the larger the vix increase, the bigger the sale.  the vix futures buy demand will be mitigated by vix etn owners selling their holdings back to the market and supplying it with synthetic vix futures.

GUS100CORRINA's picture

As VIX Explodes, A Painful Warning: The Vega Of VIX ETFs Has Never Been Higher

My response: I just can't wait to see what happens to SVXY!!! Remember, this ETF is marginable!!!


Weekly ==>

Monthly =>


chomu's picture

Study the historical term structure and then tell me why the hell anyone would ever be net long the VIX. 


I've been selling naked OTM calls on these turd ETFs for 2 years. None ever expire ITM. Its like free money


If the front month future spikes to 30, Im shorting the hell out of it


Honey-Badger's picture

I know lots of people that do exactly that.

Knobbius's picture

I'm smelling some OTM VXX puts if the VIX gets to 30...

I think you're on to something here.



Jason T's picture

armstrong is suggesting possible nuke fuck up this weekend.... or the weekend of sept 11/12 ..


Max Damage's picture

Well they are going at it already to smash it down with FED money

Squid Viscous's picture

Kick save! and a beauty!!

by team PPT, now they weave their way down the ice for a green close!

Countrybunkererd's picture

I think they call it "God's Work" and we all know what "god" that is.

SillyWabbits's picture

Rigged implies some sort of RICO activity.

Isn’t that illegal?


order66's picture

BOJ, ECB, SNB, et all will start selling vol any second. Easy money for them with their huge stock portfolios.

pound the vix's picture

Don't worry there are many Plunge Protection Teams ready and waiting to put our tax dollars at risk.

NEOSERF's picture

PPT is doing a fine job today...possible nuclear war and we are down 0.6%....Pre-Lehman this would have been down 8%

currentsea's picture


pound the vix's picture

Remember, first bounce is so wall street can get out and put their clients in.  Then the real fun happens.  Then the fed steps in.  Then crash.

lester1's picture

I'm sure the Federal Reserve's PPT will buy stocks and have all losses erased by the end of the day, just like on August 24, 2015 when they reversed a -500 point drop in the DOW in just 15 minutes!


Until the Fed is fully audited, stocks will keep up no matter what.

Countrybunkererd's picture

All the "transitory" are belong to us.  Including the 15 minute ones.  Signed, Mr. J. Yellen.

syzygysus's picture

Hey, EU close...ramp up.  Whodathunkit.

agstacks's picture

Looks like we need a few fed officals to come out today and say that we can wait until next year to begin shrinking the balance sheet, lol. 

shankster's picture

Surge baby surge!

shankster's picture

War is still sexy on Wall Street.

shankster's picture

Buy the war dopes buy the war damn it!

moorewasthebestbond's picture

Bada-bing motherfuckers!

Dragon HAwk's picture

There is an old saying in the gambling world,  that once the odds get  too lopsided, accidents ( strange things ) happen.

scoutshonor's picture

Someone last month requested a wake-up call when the S&P got to 2,450....

Wakey Wakey, eggs and bakey.

rbsx's picture

A lot of you are too stupid to even understand how these ETNs work. The reality is the any VIX-based ETF will decline because the value of the underlying options declines as they reach expiry. Ya, someone might be messing with the value of the VIX, but over the long term anyone that holds VIX ETFs are screwed. Vice-versa being short on the VIX isn't a bad strategy - even if the VIX climbs, over the long run the option's value will decline and you can take advantage of the contango. 







mily's picture

Just to be precise, Vix etfs don't use options, they use combination of Vix futures, as Vix futures curve is in steep contango (specifically that the value of the front future has to equal spot on expiry) most of the time the value of the etf is constantly eroded due to 1m2m future rolling on rebalance.

mily's picture

Visualized here

Short term VIX etns consist of 1m/2m futures, you essentially buy/sell first two points on the curve. most people think they buy etn that tracks VIX directly, it doesn't, 

it tracks short term VIX futures "S&P 500 VIX Short-Term Futures Index Total Return" (SPVXSTR) which is market view on future volatility (implied vol in 1/2 months) and obvious fact expected implied vol is higher further in the future hence the persistent contango


To Hell In A Handbasket's picture

In the words of the Bee-Gees amended "How deep is your pockets"

nostromo17's picture

does writer really know what option vega gamma are defined as mean? hard to say from articles this case true or not  - last time I saw described gsmma said delta...weurd


anyway fyi  vega of an option expresses the change in the price of the option for every 1% change 

nostromo17's picture

does writer really know what option vega gamma are defined as mean? hard to say from articles this case true or not  - last time I saw described gsmma said delta...weurd


anyway fyi  vega of an option expresses the change in the price of the option for every 1% change