Trading in what is called the "Fear Index" soared in the month of October because of the wild swings in US financial markets, a new report by S3 Partners said.
With the S&P 500 index down 8.76% in October, the expectation is that the CBOE Volatility Index (VIX) would increase dramatically, "and it didn’t disappoint, rising 75.17%," said a report by Ihor Dunsaniwsky, the managing director of Predictive Analytics at S3 Partners.
Led by the Dow industrials and the Nasdaq, both indexes careened sharply during October. In a two-day session, the Dow plunged 1,300 points and then recovered up to 600 points. The Nasdaq would fall and rise several hundred points, led by stocks such as Apple Inc (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB) and Amazon.com Inc (NASDAQ:AMZN).
Trading in the “Fear Index” measures the implied volatility of near-term S&P 500 option premiums. It can be done via futures, options or ETPs. The most popular VIX ETP is the iPath S&P 500 VIX Short Term Futures ETN (VXX) with a market cap of $929 million and short interest of $1.62 billion, the report explained.
Even as the VIX ETPs stock prices moved along with the gyrations of the VIX Index, traders began to adjust their holdings throughout the month in anticipation of future moves and possible reversals.
Bearish October long & short trading in VIX ETPs $VXX $TVIX $UVXY $SVXY $VXXB #ZIV $VIXM $VXZ $VIIX $VXZB $VMIN https://t.co/d97wn6uhHg pic.twitter.com/ejHKigKUGT
— Ihor Dusaniwsky (@ihors3) November 2, 2018
"The twelve most active VIX ETPs saw $927 million in outflows in October, slashing 24% of their total market cap. On the other hand, short sellers nearly doubled their short exposure to the VIX ETPs, adding $1.25 billion in new short exposure during the month," the report said.
Dusaniwsky said the 12 VIX ETPs provide both long and short exposure to the VIX, as well as different levels of leverage.
"To measure the true Bullishness/Bearishness of VIX ETP trading activity we need to take into account these different levels of exposure by multiplying the ETP leverage by Fund Flows and Change in Short Interest," he said.
READ: Short interest in ETFs rose in volatile trading month of October, says S3 Partners
On September 30, ETP long and short holders had a Bull/(Bear) exposure of $3.31 billion and by the end of the month their Bull/(Bear) exposure had dropped to $361 million, a Bearish move of ($2.84 billion).
"Investors had been long going into October and took advantage of the surge in the VIX index, but by the end of the month their bullishness had virtually evaporated and, in aggregate, it looks like VIX traders are looking for the VIX Index to stay at these levels for the short term," the S3 report said
"If long VIX ETP shareholders continue to reduce their positions and shorts continue to accumulate theirs, we may be looking for the VIX index to trade back down and get closer to its year-to-date average of 15-16. If the VIX index does decline, volatility would have to have decreased significantly, which would bode well for the possibility of a year-end equity rally," the report concluded.
S3 Partners is a financial technology company. Its clients use their software, data and analytics for their investment processes, risk management, counterparty relationships, and investor relations.
Reporting by Rene Pastor, contactable on rene.pastor@proactiveinvestors.com