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

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.

Comments

sickavme (not verified) Honey-Badger (not verified) Thu, 08/10/2017 - 10:59 Permalink

*Yawn* 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)...

In reply to by Honey-Badger (not verified)

GUS100CORRINA Honey-Badger (not verified) Thu, 08/10/2017 - 11:18 Permalink

As VIX Explodes, A Painful Warning: The Vega Of VIX ETFs Has Never Been HigherMy response: I just can't wait to see what happens to SVXY!!! Remember, this ETF is marginable!!!Daily====> http://www.finviz.com/quote.ashx?t=SVXYWeekly ==> http://www.finviz.com/quote.ashx?t=SVXY&ty=c&ta=0&p=wMonthly => http://www.finviz.com/quote.ashx?t=SVXY&ty=c&ta=0&p=mHOW ABOUT UVXY .... A REAL GOLD MINE IF THIS MARKET SITUATION GETS OUT OF CONTROL!!!http://www.finviz.com/quote.ashx?t=UVXY&ty=c&ta=0&p=d

In reply to by Honey-Badger (not verified)

lester1 Thu, 08/10/2017 - 10:40 Permalink

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.

agstacks Thu, 08/10/2017 - 10:53 Permalink

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. 

rbsx Thu, 08/10/2017 - 12:43 Permalink

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.  Schmucks.    

mily rbsx Thu, 08/10/2017 - 18:49 Permalink

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.

In reply to by rbsx

mily mily Thu, 08/17/2017 - 05:00 Permalink

Visualized here http://vixcentral.com/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 

In reply to by mily

nostromo17 Thu, 08/10/2017 - 13:51 Permalink

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 Thu, 08/10/2017 - 13:51 Permalink

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