The Volatility Landscape—May 2013

Updated: Oct 12th, 2014 | Vance Harwood


  • CBOE
    • The CBOE plans to extend VIX® Futures trading by over 5 hours—aligning with the London Stock Exchange open, and adding a 45 minute post settlement trading period 4:30 ET to 5:15 ET Monday through Thursday.
    • Two new volatility indexes, DLVIX and DSVIX are documented on the CBOE website.   These indexes were developed in cooperation with the French bank Société Générale and are now being used with two new European ETFs.   A quick look suggests these indexes switch VIX futures allocations based on term structure and VIX momentum.
    • Volume in VIX Futures continues to surge to record highs with April’s volume climbing 26% higher than March.  The year to year volume growth was 141%.   The chart below shows the open interest on the nearest 2 and the mid-term 4th through 7th month VIX Futures.


  • VIX Central improved its historical VIX Futures term structure graphs by switching the time axis from contract months to time to expiration.   This change greatly reduces the chances of misinterpreting term structure differences across contract expiration boundaries.  See this post for more information.
  • For the first time an inverse volatility fund—VelocityShares’ inverse short term volatility ETN XIV has taken second place in overall volatility fund assets under management (AUM) with $440 million.  The leader, Barclays’ VXX has $1.15 billion.  Third place goes to ProShares’ UVXY 2X short term volatility ETF with $344 million.  For more on inverse volatility see this post.
  • Yahoo finance now reports Exchange Traded Product (ETP) AUM as net assets in their standard quote information and has made some other information available (e.g. shares outstanding, total cash) with special tickers.   The topics and example tickers shown below for SPDR’s JNK:
    • Intraday Indicative Value   ^JNK-IV
    • Shares Outstanding   ^JNK-SO
    • Net Asset Value ^JNK-NV
    • Estimated Cash ^JNK-EU
    • Total Cash  ^JNK-TC
  • I recently found out about the Quandl data resource—a free source of downloadable price data  futures, stocks, rates, currencies, commodities; macro-economic data from FRED, BEA, DOE, Census, USDA, WB, UN, OECD; demographic and society data; and corporate financials.  There’s a lot of good stuff there.



  • With both UVXY and TVIX trading well below $10 per share the question of upcoming reverse splits has returned.
    • I expect ProShares to reverse split UVXY 10:1 in May or June—they don’t want to lose the momentum that they have built up.
    • The last time around (December 2012) Credit Suisse waited until TVIX had dropped below $1 per share before doing a reverse split.  With $188 million in assets, I doubt they’ll let this product fade into oblivion, but given their track record of procrastination I’m guessing we won’t see a reverse split until TVIX is South of $1—perhaps in October / November.


White Papers

  • Easy Volatility Investing” by Tony Cooper
    • This paper took 2nd place in the National Association of Active Investment managers’ (NAIIM) recent Wagner Award contest.   It provides a good overview of volatility trading and then does a thorough evaluation of 5 different trading strategies for volatility products: buy & hold, momentum, roll yield, volatility risk premium, and hedged.
  • Option traders use (very) sophisticated heuristics, never the Black-Scholes-Merton formula”   Haug & Taleb
    • I hadn’t seen this 2009 paper until recently.  Taleb claims that the practical impact of the Nobel Prize winning work of Black-Scholes-Merton on the options markets is significantly over emphasized.  He argues that structural relationships like put / call parity and compatibility between options combinations at various strikes (e.g., no negative butterflies) are the true forces setting options prices.
  • Volatility Trading: Trading Volatility, Correlation, Term Structure and Skew” Bennett & Gil
    •  Over 200 pages of wide ranging information—from covered calls to exotic options, to links between CDS spreads and implied volatility.  Something for everyone.



  • I’ve added Citi Group’s CVOL and Barclays’ XVZ to my “Not recommended” list of volatility funds.
    • CVOL’s assets under management have dropped to $2.2 million and its bid/asked spreads are very wide.  Its strategy of trying to track volatility is sound, and their contango losses are less than UVXY or TVIX, but it’s just too small.
    • The intent of Barclays’ XVZ was to create a fund that was long volatility, but could be held during quiet times without losing much if any money.  XVZ attempted to do this by hedging a position in medium term volatility products with a short position in short term volatility.  Unfortunately for XVZ, the VIX Future term structure shifted about the time the fund was introduced in such a way that the hedging didn’t work and it has lost 30% in the last year.  XVZ might do OK during times of high volatility, but until it establishes some sort of track record in that environment I’d recommend staying away.   For more on XVZ there’s a good article “The Hedge That Wasn’t” posted by Season Investments.

A Volatility Spike Barclays’ XVZ Would Have Missed

Updated: Dec 1st, 2012 | Vance Harwood

Bill Luby of VIX and More, noted that yesterday, February 27, 2007 is the five year anniversary of  the biggest daily percentage jump in the VIX index’s history.  The index jumped from a 11.15 close the previous day to 18.31 —a 59% jump.

Normally I would expect a volatility strategy fund like XVZ, VQT, or VSPY to perform very well during a volatility spike of this magnitude.  None of these funds existed back then, but my backtest of XVZ shows XVZ would have stayed flat, and I doubt the others would have done well either.

The chart below (click to enlarge) shows XVZ’s backtested performance since 2004 compared to VIX.  In general it has very good performance during volatility spikes.


VIX vs XVZ since 2004

The February 2007 spike was different.    The chart below shows a close-up of VIX and a simulated XVZ in that time period.

VIX vs XVZ February 2007

Unlike most volatility spikes there was no forewarning on this one—things were quiet, then a big one day jump.  The chart below shows a more typical run-up that happened in 2006, where XVZ would have gained about 9% overall by the time the spike was over.

VIX vs XVZ 2006

When I was generating the backtest for XVZ I noticed this anomaly.  A closer look revealed that XVZ wouldn’t have caught this spike because its asset allocation strategies on any given day are based on the closing value of the VIX to VXV ratio two days before.    When the spike occurred XVZ would have still been in its full contango fighting mode, short 30% short term rolling futures, and long 70% medium term futures—the moves in the two positions would have cancelled each other out.   By the time XVZ adjusted the VIX was already into its mean reverting mode.

Inherent time delay in the triggers (e.g., SPX historic volatility, implied volatility) used by other volatility strategy funds like VQT and VSPY hobble them with the same inability to capitalize on fast volatility spikes.   The spike in 2007 was triggered by a 9% blow-off in the Chinese stock market, but the scenarios that worry me more are no-warning events like natural disasters (earthquake/tsunami) or terrorist attacks.  Generally there is no forewarning on these events and they could have significant impacts on the market.    None of the first generation volatility strategy funds address this gap, hopefully the second generation will.



VelocityShares’ Short Term Volatility Offerings Overtake Barclays’

Updated: Mar 9th, 2012 | Vance Harwood

Barclays had the short term volatility ETF space to itself from January 2009 until November 2010 with their VXX long and XXV short ETNs.  On November 30th, 2010 VelocityShares came on the scene with three new short term funds: 1X long VIIX , 2X long TVIX, and -1X daily inverse XIV.  Fifteen months later, on February 14th, the combined daily volume of  these VelocityShares ETNs exceeded Barclays.  And it wasn’t a close thing—52 million vs 45.4 million shares traded.

Barclays Short Term Volatility Volume vs VelocityShares


In the ETF world a near two year head start is hard to overcome.   Barclays’ VXX in particular has become very successful,  trading at least 5 to 10 million shares a day and spiking as high as 140 million.   While VIIX was essentially a clone of VXX,  VelocityShares’ two other offerings were different.   In the volatility space the 2X leveraged TVIX seemed a bit outrageous,  but it has turned out to be what traders wanted—an investment that tracks the VIX index respectably well.

Volume the last 4 months


VelocityShares’ XIV differed from Barlcays’ XXV, and its follow-ons IVO & IVOP by targeting an inverse daily percentage performance, instead of acting like a true short.    The two approaches battled it out for a while.   The inverse daily percentage approach has path dependencies that prevent it from exactly mirroring the target index, but Barclays’ true short approach suffers from variable leverage.  At inception true short volatility ETNs are 1X funds, but their leverage (or “participation” as Barclays calls it) decreases if volatility goes down and increases when volatility is high—not the ideal characteristic for an inverse volatility fund.

During September 2011’s volatility spikes IVO’s leverage accelerated to 3X right before it collided with its $10 termination point.  Barclays was ready with its replacement IVOP, but then it had a near death experience when it dropped from $20 to $11.3 just eleven days after its inception—again driven by high leverage.   If VXX had gone just 4% higher IVOP would have terminated too.   Not surprisingly investors have shifted to the daily percentage approach.  XIV has a termination provision too, but it’s tied to a -80% percentage move that’s better suited to the rough-and-tumble world of volatility.   On February 14th the combined volume of XXV+IVOP was 40 thousand, compared to 15 million for XIV…

Credit Suisse AG, the issuer of  VelocityShares’ notes has to like the roughly balanced assets under management (~$400 million) between TVIX and XIV.  The asset risk on the short side naturally cancels the risk on the long side—reducing the amount of hedging they have to do.

I’m surprised that Barclays has not responded to VelocityShares’ challenge with similar funds.   They are  innovators that were first to market, but apparently they just can’t bring themselves to use the daily percentage move approach.

VelocityShares continues to introduce new products.  In October they added ETNs targeting the commodities space,with 3X long and 3X inverse funds for gold, sliver, platinum, and palladium, and just last week they added 3X long and 3X inverse products for  Brent and crude oil, natural gas, and 2X long and 2X inverse for copper.   See this IndexUniverse post for more information.

Coming up soon I’m guessing VelocityShares will introduce six new Volatility ETNs based on new index methodologies they created in conjunction with S&P indices.   These indexes offer dynamic volatility exposure similar to Barclay’s innovative XVZ S&P 500 Dynamic VIX ETN which provides a volatility investment suitable for medium to long term timeframes.

Disclosure:  long XIV and XVZ

How Does Barclays’ XVZ ETN Work?

Updated: Mar 12th, 2017 | Vance Harwood

Barclays’ XVZ volatility ETN is intended to allow investors to profit from volatility jumps without the contango losses that drag down approaches like Barclays’ VXX short term and VXZ medium term long only products.   To accomplish this XVZ switches between 11 different mixes of short term and medium term positions in volatility futures.  In volatile times there can be a different setting every day.

The switching itself is driven by the VIX/VXV ratio (Barcalys calls this ratio “Implied Volatility Term Structure” or IVTS) —the higher the ratio, the higher the fear that is being experienced in the market.   With settings 1 through 5 shown in the table below XVZ is holding short positions in short term volatility futures—which attempt to be profitable when volatility futures are in contango.  The rest of the settings are long both short and medium term futures in various mixes.

IVTS = VIX/VXV Set Actual Short Term Alloc. Actual Medium Term Alloc. Backtest Days Description
IVTS < 0.9 1-E -0.3 0.7 307 Contango mode, very low fear
0.9 <= IVTS < 1.0 2-E -0.2 0.8 402 Contango mode, moderate fear
3 -0.175 0.825 2
4 -0.125 0.875 24
5 -0.075 0.925 29
1.0 < IVTS <= 1.05 6-E 0 1 80 Transition
7 0.05 0.95 4
8 0.125 0.875 20
1.05 <= IVTS <= 1.15 9-E 0.25 0.75 43
10 0.375 0.625 10
IVTS > 1.15 11=E 0.5 0.5 26 Backwardation,very high fear
947 Total days

In XVZ’s prospectus only 5 of these settings are explicitly called out (the sets with the”-E suffix), but the fine print specifies that allocations won’t change day to day by more than 12.5%. In practice this creates intermediate points to smooth out the changes.  Since some of these setting are closer than 12.5% from each other, it is possible to skip over settings in a day-to-day shift.   The other thing to remember in tracking XVZ’s movements is that today’s performance is driven by the allocations that were put in place the previous business day—and  those allocations were driven by the VIX/VXV ratio at the close of the market the business day before that.

In the table notice that of the 947 trading days of the backtest 709 of them (75%)  would have been in the two lowest, contango mode settings.

I’ve updated my XVZ backtest chart below, showing VIX and VIX/VXV  multiplied by 10.  XVZ  is making big decisions based on -10% / + 15% moves in the VIX/VXV ratio.

XVZ vs VIX and VIX/VXV, click to enlarge

The graph below shows my simulated XVZ (red) vs the actual XVZ (green) for August and September.  Things are tracking nicely.

XVZ sim vs actual, click to enlarge

If you are interested in purchasing the XVZ backtest data, or the data plus the underlying indexes and formulas see this post.

Barclays’ XVZ—A Long Volatility Fund That Won’t Fade to Zero

Updated: May 30th, 2017 | Vance Harwood

Almost everyone that invests would love to have a cost effective way to insure against market declines.   Securities that allow you to go long on volatility are attractive because they tend to go up when the market goes down,  but none of them, when sized to really protect an investment are affordable in a “set and forget” sort of way.     Barclays attempted to fill this need with XVZ, but it appears that they missed the mark.

The first generation volatility ETNs like Barclay’s VXX and VXZ, enabled investors to bet on volatility without using futures or options,  but VXX suffers greatly from contango in non-fearful times.  It has dropped from a split-adjusted $26500 a share at its inception in early 2009 to $14 in May 2017—a loss of 99.95%.   Gathering accolades like: “VXX may be the worst investment vehicle ever created”, Barclays was wise to not sit on its laurels even with VXX holding over $1 billion in assets.

Another first generation fund, UBS’s XVIX, (no longer in existence) added the innovation of shorting a percentage of short term futures while being long medium term futures, but it has had a totally uninspiring existence since it was created in February 2011.  Its fixed 50% short, 100% long mix of short and medium futures has failed to do anything.    Another follow-on fund, CitiGroup’s CVOL (also no longer in existence), added a dynamic component—a variable short position in the S&P 500, adjusted monthly.  However, this adjustment, intended to make CVOL act more like the VIX index, did nothing to protect itself from contango.  It also suffers greatly during the non-panic times.

Barclays uses both of these techniques but adapts them to reducing the contango induced costs of being long volatility.  These backtested results, taken from the XVZ prospectus, looked very impressive.  Unfortunately, contango in the medium term volatility VIX futures that XVZ holds increased considerably starting in 2010 which led to large losses (-30% April 2012 to April 2013) in the fund.  From 2014 on XVZ has held its value better, but there is still erosion of value that won’t completely stop until the next big correction or bear market boosts XVZ’s value back up.

Backtest of XVZ, click to enlarge









The big jump and lack of decay after the 2008/2009 crash is astonishing. The scale of the chart is so vast that it could be misleading, but compared to the equivalent VXX chart, XVZ looks very, very good.  Update:  I have backtested XVZ myself now.  See the results here.

VXX % backtest, click to enlarge