Why Are The VIX ETNs Not Showing Fear? (VXX, VXZ)

“With the market declining every day, where’s the fear? Well, perhaps it’s because we have declined in a fairly orderly fashion the past few weeks. On average, the VIX carries about a 4-point premium to realized volatility. It’s a very inconsistent relationship, as the VIX quantifies implied volatility (expectations for the futures) whereas realized volatility by definition looks backward. But all things being equal, VIX will average about 4 points above it. But now, well, not so much. Even with Friday’s drop, the VIX sits a good 12 points above realized volatility,” Adam Warner Reports From Options Zone.

Warner goes on to say, “It may surprise you to see realized volatility so low. It sure surprised me. But this often happens with one-directional moves. We miss a bit of the forest through the trees. The daily ranges and moves are not that extraordinary. What does it all mean? Well, this sort of action makes both net long and net short gamma strategies quite challenging. The net long strategies may not work because the daily moves do not provide enough opportunity to flip stock so as to offset daily decay. The net short strategies may not work because most people don’t hedge them aggressively in slow markets, and then get caught by the price drift in the underlying.”

“If memory serves me correctly, we saw similar behavior at times in 2008: ugly markets, indifferent options and much questioning as to the perceived lack of fear. That, of course, did not end well, but I would not go calling for a rerun so fast. The iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) and VIX futures do expect at least this VIX level to persist. They pretty much price in mid-30s VIX forever, or at least into December, which is as far as they list,” Warner Reports.

We have also put together some more details on the iPath S&P 500 VIX Mid-Term Futures Note (NYSE:VXZ) and the iPath S&P 500 VIX Short-Term Futures Note (NYSE:VXX) below:

Chart foriPath S&P 500 VIX Short-Term Futures ETN (VXX)

iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) Visit Our VXX Category: HERE 

The investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

Chart foriPath S&P 500 VIX Short-Term Futures ETN (VXX)

iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ) Visit Our VXZ Category: HERE 

The investment seeks to replicate, net of expenses, the S&P 500 VIX Mid-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the fourth, fifth, sixth and seventh month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the fourth month VIX futures contract into the seventh month VIX futures contract. 

Chart foriPath S&P 500 VIX Mid-Term Futures ETN (VXZ)

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