Estimated VXX Reverse Split Number 5—December 2017


Updated: Nov 21st, 2016 | Vance Harwood

Based on historical decay rates I’m predicting that Barclays will reverse split VXX again in December 2017.  At that point VXX’s level will probably have declined again to around $10 per share—which seems to be the level that triggers the reverse split.

it.For a security doomed to decrease in value over time Barclays’ VXX does amazingly well.  Its volume averages over 40 million shares per day and its assets under management have stayed around $1.0 to $1.5 billion for the last couple of years.  Not bad for a product that has averaged a 58% annual loss since its inception in January 2009. This works out to an average loss of almost 7% per month. See “Volatility Fund Monthly and Year Decay Rates” for a chart showing how these losses have varied over time.

According to its prospectus, Barclays can reverse split VXX any time after it closes below $25 and that reverse splits will always be at a four to one ratio.

History of VXX Reverse Splits

Event Dates Split Ratio Inception / close price right before reverse split (split adjusted)  Months since inception /last split
Inception 30-Jan-2009 100 (25,600)
1st Rev. Split 8-Nov-2010 4:1 13.11 21
2nd Rev. Split 4-Oct-2012 4:1 8.77 23
3rd Rev. Split 8-Nov-2013 4:1 12.84 13
4th Rev. Split 8-Aug-2016 4:1  9.27 34
5th Rev. Split 12-Dec-2017 4:1  10 (estimated) 17


The first and second splits of VXX occurred after about 22 months, but 2012 did not have volatility bumps like 2010 and 2011, so the 3rd reverse split was only 13 months after the 2nd one.   Volatility has kicked up quite a bit since 2014 so it took a record 34 months before Barclays reverse split this product again. The approximate decay per month slowed down to “only” around 3.5% per month (35% per year).  In 2016 decay rates have returned to more historic norms—with decay rates in the 7% to 9% range.

The chart below, with both log and linear scales, shows VXX’s sordid split adjusted price history.

VXX since incept

Given its horrid track record, it’s fair to ask why people keep investing in VXX. Some are just trying to profit from volatility spikes, hoping to catch the next big crash that somebody is always predicting to happen soon. Others are trying to hedge their equity holdings with VXX because it is one of the few securities that reliably goes up when the market is panicking.  Unfortunately, this strategy rarely works well.  Unless your timing is very good owning enough VXX to effectively hedge your portfolio is prohibitively expensive.

Specifics of the Split

If you hold shares of VXX there isn’t anything to worry about when it reverse splits.  The value of your investment stays the same through the reverse split process.  You just have 4X fewer shares that are worth 4X more each (assuming a reverse split ratio of 4:1).   If your shareholdings are not a multiple of four, say 215 shares, you will get 53 reverse adjusted shares and a cash payout for the 3 remaining pre-split shares.

If you are short VXX, same story, no material impact.

If you were holding VXX options (long or short) when the reverse split occurred there’s still no material impact, however, the option chains are going to hurt your head for a while.   This Options Clearing Corporation memo describes the adjustments for the August 2016 reverse split.   It adjusts the number of VXX shares per option on the pre-split contract from the usual 100 to 25.  The option strikes are not adjusted and the underlying symbol that the options trade against is VXX1, a new symbol—which is set at 25% of VXX’s price.  These contortions are required so that holders aren’t left with fractional contracts–something the options clearing house doesn’t want to deal with.

So, as an example, let’s say you hold ten pre-split options on VXX with an expiration date of August 19th and a strike price of $10.  Each contract was worth around 0.19 ($19) at the close on August 8th (VXX’s closing price was 9.30)  so your overall position value is around $190.   After the reverse split your contracts are adjusted so each contract has 25 shares of the new reverse split VXX as its deliverable.  The strike price, $10 stays the same, and the effective price of the underlying that the option is priced against is the current VXX value divided by 4.    So, if on August 9th, right after the reverse split VXX’s price is $37.2 and VXX1’s price is 9.3.  Your options will continue to be worth about $19 each, and you still own 10 contracts so your position is still worth around $190.  The only difference is that if you exercise all your contracts you won’t get 1000 shares of VXX, you’ll get 250 shares.

New options created after the split will be generated with VXX as the underlying, but the old adjusted options will hang around until they expire.  I’ve seen reports that the liquidity on the adjusted options is not good, so if you are planning on exiting your options, rather than just letting them expire you should consider closing out your positions and reestablishing them after the split.

For regular, forward splits things are more straightforward —the strike price of the options are divided by the split ratio, and the number of contracts is multiplied by the split ratio.  See the OCC memo on SVXY’s 1:2 split for an example.  This basic approach can’t be used on reverse splits (multiply the strike price and divide the number of contacts by the split ratio) because depending on the number of contracts held some customers would end up with fractional contracts—which is a no go.

The chart below uses my simulated data plus actuals to show VXX’s price history since 2004

VXX log since 2004

For more see:

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Monday, November 21st, 2016 | Vance Harwood
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  • hans

    Interesting but how do we discern if these institutions are not potentially held SHORT the instrument?

  • Marco

    with ‘normal’ (i.e. shares based) ETFs like say SPY market making banks will hold the ETF vs. the stock basket (long one and short the other) and can create and redeem ETFs shares with the ETF sponsor in exchange for the basket. So their holding in the ETF wouldn’t usually mean much as it would usually be hedged.
    Not sure how that works with the VIX future based ETN’s and whether the market making banks can create and redeem ETN’s vs. VIX futues with the respective ETN sponsors (Barclays for VXX, Credit Suisse for TVIX etc.)
    Also there are several ETFs out there like VQT that try to hedge long stock exposure with VXX. Don’t know if they hold VXX ETN for that or whether they just replicate the same index as VXX with VIX futures.

  • Hi Hans, I don’t know if they have to report short holdings as well as long. It seems like they should. In the case of Barclays, it can be subtler than that. Since VXX is an ETN, not a ETF Barclays does not have to reveal what, if anything they are using to hedge their position. My guess is that they might hedge only 90% of their position, essentially giving them a 10% short position. For more see http://sixfigureinvesting.com/2013/04/how-does-vxx-work/

    Best Regards,

    Vance

  • Hi Marco, With the ETN’s the market makers / Authorized participants have a cash / shares style transaction with the issuer. The issuer will create / redeem shares at the index price for cash, so there is no index tracking error. The market makers hedge their positions internally, I assume usually with VIX futures. In the case of VQT I suspect they would use VIX futures directly to hedge their positions-using VXX would incur additional costs.

    — Vance

  • hans

    Thanks Vance
    It sure would be nice to know who is net long or short volatility.

    I just find it hard to believe the smart money is long these things. Besides the COT report where else would one look to get an idea behind what type of entity has which bias?

    I think this is going to become important because one of my concerns is that I expect shorting volatility to become a crowded trade in the future.

    Do you have any speculations as to HOW and what types of idiosyncrasies might manifest as a result?

  • Hi Hans,
    I don’t know of any other way of determining institutional holdings, but that subject is certainly not in my expertise. I agree with you–I don’t think they are net long. With regards to the short trade getting crowded I think it is possible to get a feel for the short interest on VIX Futures. I’ll look into that. The short interest on the ETPs is visible via sites like shortsqueeze.com. In general I would expect heavy volatility selling to compress the VIX premium over historic volatility and flatten the overall VIX term structure.

    — Vance

  • wwt17

    Wow, this discussion has gotten little play. Short VXX the last 4 years and adding during vol. spikes.

  • Sam

    Vance –

    I have a general question for you….this article brought it to mind.

    I understand the mechanics of option position adjustments in the event of a reverse split. I don’t need a refresher on that….

    But could it be the case that there is a potential reduction to the time value of some of the at and some of the near but still out-of-the money options, as a result of a reverse split ?

    While it is true that options will remain out of the money in the exact same percentage as previously, there seems to be a factor at play – either because of the reduced number of shares per contract or because of the introduction of several new intermediate strike prices.

    I am not sure exactly why that might be, but I recall having actually
    seen an example of this with some positions in the past. My memory is that I held some LEAPs and was writing calendar spreads. It seemed that the long position fell in value as it became more in the money on an absolute basis …and to some degree and my ability to sell shorter term at the money or somewhat out of the money options was hurt to some degree as option premium declined across the time series.

    I know this is very anecdotal, but I recall thinking it was an actual phenomenon that I should investigate. I don’t recall thinking that it was something to be exploited but I remember thinking that it might be something you wanted to avoid being on the wrong side of.

    Do you have any thoughts or have you possibly come across this in the past ?

  • Hi Sam, Theoretically I don’t see a mechanism that would impact the time value. The only thing I’ve heard of is that liquidity on the adjusted options goes down significantly. Certainly most retail traders wouldn’t even see the adj strikes in the chains, and if they did wouldn’t know what to do with them. The market makers would likely make the holders pay for that lack of liquidity.

    — Vance

  • QuanTimer Support

    Hi Vance,

    Thanks for the informative article. You wondered, “Given its horrid track record, it’s fair to ask why people keep investing in VXX.”. Personally I would like to see a product like VXX in the market. At QuanTimer.net I run a couple of VXX-based models. In one of the aggressive models I short VXX most of the time. These models are offered to others on a subscription basis. However, I have been trading one of the earlier models myself almost for a year now. Visit my website http://www.quantimer.net to learn more about them, if you are interested.
    Regards,
    Ryan

  • Harapa

    Hi Vance,
    May be you can clarify.
    If I held 100 contracts(100 shrs) of VXX180119P5 before the split. I will now have 100 contracts ( but of 20 shrs) after the split and put price multiplied by 4. Right? So how on the earth this contract will ever get ” in the money” to exercise since they will never let VXX drop below $5. Will this be a loosing trade even if VXX looses 70-80% before expiration and why?

  • Daggman

    Vance,

    Do you know when the new VXX options contracts come out? Waiting for the new strike prices. Thanks!!!

  • Looks like they are trading now (10-Aug-16),

  • Iyad Abbas

    Just curious how your broker handled the recent reverse splits on VXX and UVXY. I am using ToS and I had options open (Paper trading) and the totals went from +$200 to -$2000 after the split. It seems like they tried to convert my options over to new ones.
    Anyone else have experience with ToS? I will try calling support but since it is paper trading they may not care. I am hesitant to trade live now.
    I also have a IB account if anyone had traded options with them through the reverse split can comment

  • Hi Lyad, I’m not holding positions right now, but I’ve heard some reports of broker software not handling this correctly. Not real surprising given that having options on a stock that reverse splits is pretty unusual. The brokers have a responsibility to get these things corrected on live accounts, although it might take a few days. The paper trading might be a different story.

    It will probably be at least 6 months before UVXY reverse splits again and at least a year before VXX splits again.

  • Scott Gifford

    Vance,
    Why would anyone would want to trade the VXX1 if they can trade VXX?
    I currently hold (pre-split) 40 VXX 1/2018 Strike $60 @ 0.75 = $3,000 investment loss 🙁

  • Hi Scott, The market maker is your counter-party here. Give what I suggested a try, there’s no downside in trying.