Most Overlooked Opportunity of 2022

Disclaimer Before I begin, I wish to announce that I'm an experienced volatility trader who specializes in trading volatility futures and volatility ETPs such as $VXX. $VXX is a complicated product and consists of many advanced variables and metrics that most investors are not familiar with, nor suited to trade. Trade these products at your own caution and be sure to read the full prospectus of $VXX here before making any trading decisions. Feel free to trade this as you please, as all positions hold risk. Opportunity may be present, however, we don't know when Barclays will make the announcement. I'm not a financial advisor. I only wish to state my opinions relative to my personal trades and investments as I believe it offers educational value to those wishing to learn. - VolatilityStreet Initial Explanation One of the market's most popular instruments, $VXX, recently underwent an anomaly of an event that hasn't occurred in over 10 years in the volatility-trading space. On March 14, 2022, Barclays announced a suspension of share sales and issuances on the iPath® Series B S&P 500® VIX Short-Term FuturesTM ETNs (BATS: $VXX). Ok, so what? The reason that I bring attention to this announcement is as follows: Generally speaking, the $VXX is built to track the first- and second-month VX futures on a rolling basis. Barclays, the issuer of $VXX, doesn't actually hold underlying futures contracts to maintain the ETN, rather, it tracks the performance of the underlying futures contracts on a rolling basis. The product that the ETN tracks is known as the net asset value (NAV) or "indicative value" of the underlying ETN. Issuers use NAVs as a metric to match their ETN prices to their NAV. Essentially, in order for Barclays to maintain the publicly traded product, they match long and short order flow on their ETNs. For example, if a trader wanted to buy 1,000,000 VXX ETNs in one transaction block, Barclays will usually issue 1,000,000 shares of VXX to keep the price of the ETNs the same. On traditional shares of stock, however, 1,000,000 shares of stock in one transaction block could change the stock price due to an increase in demand and a shortage of supply. Equities, unlike ETNs, do not issue shares of stock for order flow to keep the price of the security at its NAV. Whereas, ETNs generally issue notes to keep the ETN price at its NAV. The breakage Considering that Barclays is no longer issuing shares for their $VXX ETNs, long order flows will not result in the issuance of new shares. So, what does this mean? Let's say you purchase 1,000,000 shares of stock, similar to the equity example made in the last paragraph. The purchased shares are no longer issued by Barclays to keep the price of the ETNs at their NAV. Rather, the existing market participants must sell their 1,000,000 shares of stock to you. Due to the increase in demand, the price of the ETNs will increase past their NAV. Where is $VXX trading now relative to its NAV? $VXX is trading approximately $3.00 above its NAV (approximately a 12% premium). As more investors purchase $VXX, the share price will continue to rise until authorized participants or Barclays announce the resumption of share issuances. Eventually, however, Barclays will announce the resumption of share issuances, which will result in a fast, and certain, decline back to $VXX's NAV. $VXX - $VXX (NAV) Has this happened before? Yes. On February 22, 2012, $TVIX (a 2x leverage front- and second-month VIX futures ETN) experienced a suspension of share issuances. $TVIX continued to rapidly rise (high of 90%) above its NAV for an entire month before the announcement of resumption of share issuances was released (March 22, 2012). Once share issuances resumed, $TVIX crashed nearly 60% in 2 days back to its NAV. Closing Values of $TVIX relative to its NAV How can this be traded? Well, until Barclays announces the re-issuance of shares, traders could take the long approach and trade the upside that $VXX could experience. After all, $VXX is a volatility product. Volumes generally increase when markets experience volatility. $VXX's value could drastically surpass the current `12% premium value given the price discrepancy between its ETN value and NAV. On the contrary, once the announcement occurs, traders can enter short delta trades using the options market, which is generally liquid on a product such as $VXX (may not be as liquid due to the current crisis).

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Most Overlooked Opportunity of 2022 | $VXX

bullish

Disclaimer

Before I begin, I wish to announce that I'm an experienced volatility trader who specializes in trading volatility futures and volatility ETPs such as $VXX. $VXX is a complicated product and consists of many advanced variables and metrics that most investors are not familiar with, nor suited to trade. Trade these products at your own caution and be sure to read the full prospectus of $VXX here before making any trading decisions.

Feel free to trade this as you please, as all positions hold risk. Opportunity may be present, however, we don't know when Barclays will make the announcement. I'm not a financial advisor. I only wish to state my opinions relative to my personal trades and investments as I believe it offers educational value to those wishing to learn.

- VolatilityStreet

Initial Explanation

One of the market's most popular instruments, $VXX, recently underwent an anomaly of an event that hasn't occurred in over 10 years in the volatility-trading space. On March 14, 2022, Barclays announced a suspension of share sales and issuances on the iPath® Series B S&P 500® VIX Short-Term FuturesTM ETNs (BATS: $VXX).

Ok, so what?

The reason that I bring attention to this announcement is as follows:

Generally speaking, the $VXX is built to track the first- and second-month VX futures on a rolling basis. Barclays, the issuer of $VXX, doesn't actually hold underlying futures contracts to maintain the ETN, rather, it tracks the performance of the underlying futures contracts on a rolling basis. The product that the ETN tracks is known as the net asset value (NAV) or "indicative value" of the underlying ETN. Issuers use NAVs as a metric to match their ETN prices to their NAV. Essentially, in order for Barclays to maintain the publicly traded product, they match long and short order flow on their ETNs. For example, if a trader wanted to buy 1,000,000 VXX ETNs in one transaction block, Barclays will usually issue 1,000,000 shares of VXX to keep the price of the ETNs the same. On traditional shares of stock, however, 1,000,000 shares of stock in one transaction block could change the stock price due to an increase in demand and a shortage of supply. Equities, unlike ETNs, do not issue shares of stock for order flow to keep the price of the security at its NAV. Whereas, ETNs generally issue notes to keep the ETN price at its NAV.

The breakage

Considering that Barclays is no longer issuing shares for their $VXX ETNs, long order flows will not result in the issuance of new shares.

So, what does this mean?

Let's say you purchase 1,000,000 shares of stock, similar to the equity example made in the last paragraph. The purchased shares are no longer issued by Barclays to keep the price of the ETNs at their NAV. Rather, the existing market participants must sell their 1,000,000 shares of stock to you. Due to the increase in demand, the price of the ETNs will increase past their NAV.

Where is $VXX trading now relative to its NAV?

$VXX is trading approximately $3.00 above its NAV (approximately a 12% premium). As more investors purchase $VXX, the share price will continue to rise until authorized participants or Barclays announce the resumption of share issuances. Eventually, however, Barclays will announce the resumption of share issuances, which will result in a fast, and certain, decline back to $VXX's NAV.

$VXX - $VXX (NAV)

Has this happened before?

Yes. On February 22, 2012, $TVIX (a 2x leverage front- and second-month VIX futures ETN) experienced a suspension of share issuances. $TVIX continued to rapidly rise (high of 90%) above its NAV for an entire month before the announcement of resumption of share issuances was released (March 22, 2012). Once share issuances resumed, $TVIX crashed nearly 60% in 2 days back to its NAV.

Closing Values of $TVIX relative to its NAV

How can this be traded?

Well, until Barclays announces the re-issuance of shares, traders could take the long approach and trade the upside that $VXX could experience. After all, $VXX is a volatility product. Volumes generally increase when markets experience volatility. $VXX's value could drastically surpass the current `12% premium value given the price discrepancy between its ETN value and NAV. On the contrary, once the announcement occurs, traders can enter short delta trades using the options market, which is generally liquid on a product such as $VXX (may not be as liquid due to the current crisis).

read-time
3 min
30.00
Target Price
9/ 10
Confidence
2-6 Months
Timeframe
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Earnings Release
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News
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SEC
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Sentiment
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