Actually there are two separate questions:
- Has VIX itself bottomed?
- Have the ETFs and ETNs linked to VIX bottomed?
As I have discussed here, here and here, there is a big difference between what we see and quote as VIX every day and the products linked to it.
The case for VIX rising from here remains mixed (which in my opinion is an improvement in VIX's underlying conditions) and the VIX related products all rebounded from lows set on Tuesday May 10th.
Things that should increase volatility include:
- Continuing concern about China which was validated by more weak numbers over the weekend
- The BREXIT vote is fast approaching and it is unclear which side will win and it is also unclear what the ramifications of a "NO" vote would mean - all of which should enhance volatilty
- The next FOMC meeting is also on the Horizon as markets have to prepare for the June 15th decision along with fresh "dot plots" and the associated press conference. That too can add to volatility.
- The ongoing "onslaught" of corporate bond issuance might unnerve the market.
- Other factors ranging from crude oil to the Japanese Yen will also continue to supply volatility.
There are several factors that tend to dampen volatility
- Seasonality tends to dampen volatility as we head towards Memorial Day and the official start of summer in the U.S.
- A dearth of data as earnings season is largely behind us and Chinese data, as opaque as it may be, is entering a slow period making it difficult to divine what is occurring in the underlying economy there
From this brief list, one might be inclined to assume that the forces in favor of pushing VIX higher outweigh those dragging it down, the other even more difficult question is what is priced in.
VIX Futures
All of the large VIX related ETFs and ETNs (VXX, UVXY, TVIX and XIV) are all tied to the VIX futures contract.
On Friday May 13th the VIX index was 15.04
The VIX May16 contract closed at 15.875. This contract will cease trading on May 18th.
The VIX Jun16 contract closed at 18.075 and the VIX Jul16 contract closed at 19.225.
So the first battle that the VIX linked products face is this "steep" curve. While we know that June has several events on the horizon that could cause volatility to increase, the June VIX futures contract is over 2 points higher than the May contract. Not an impossible hurdle to overcome by any means, particularly if spot VIX spikes, but a hurdle nonetheless.
From the ProShares website you can find that UVXY owns 10,446 May VIX contracts and 94,057 June VIX contracts.
Each and every day, UVXY diligently sells some of the "first" contract (May in this case) and buys more of the "second" contract - June in this case.
With 40% of the open interest and a daily, programmatic buying program in place, it is impossible not to wonder if some of the "steepness" in the VIX curves is directly related to this buying?
If it is, then there is reason to be concerned, because starting Thursday, once the May contract expires, the June contract will become the front contract and will be sold each and every day to buy July contracts.
Again, there is nothing to stop VIX itself from going higher, which will boost all of the VIX linked products, but there are hurdles for those to overcome.
Disclaimer: The content provided is property of Peter Tchir and any views or opinions expressed herein are those solely of Peter Tchir. This information is for educational and/or entertainment purposes only, so use this information at your own risk. Peter Tchir is not a broker-dealer, legal advisor, tax advisor, accounting advisor or investment advisor of any kind, and does not recommend or advise on the suitability of any trade or investment, nor provide legal, tax or any other investment advice.
