Volatility ETF Trading Volume Explodes as VIX Cracks 20

December 28th at 10:07am by John Spence

Volatility-linked ETFs have been, well, volatile the past two days on extremely heavy trading volume. Traders who haven’t closed the books on 2012 or left for holiday vacation have been whipsawed by a jittery market driven by the latest headline on fiscal cliff negotiations.

Volatility-linked exchange traded products such as iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), VelocityShares VIX Short-Term ETN (NYSEArca: VIIX), VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX), ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) opened higher Friday.

The funds, which are designed to track futures contracts based on the CBOE Volatility Index, had a wild day Thursday along with the U.S. stock market as fiscal cliff talks appear to be going down to the wire. Congressional leaders and the Obama administration need to hammer out a deal by year-end or automatic spending cuts and higher taxes will be triggered. Investors are worried the economy could slip back into recession in 2013.

The VIX rose above 20 on Thursday for the first time since July. [Volatility ETFs Rally as VIX Jumps 30% in Six Days]

“The VIX is telling us the time of reckoning is upon us,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, in a WSJ.com report. “We’ve had incredibly low volatility during the second half of the year, but now we could be entering into a time of higher volatility.”

The volatility products are seeing trading volume skyrocket this week. For example, TVIX saw its highest volume ever on Thursday in terms of shares traded. Over 5 million TVIX shares traded on Thursday.

ProShares VIX Mid-Term Futures ETF (NYSEArca: VIXM) traded nearly 1.7 million shares on Thursday. The average daily volume over the past three months is about 83,500 shares.

VXX is the largest volatility-linked product with a market cap of about $1.1 billion, according to issuer Barclays. The exchange traded note’s price was all over the place on Thursday in a volatile session. It actually closed with a slight loss after rallying as much as 6%.

“After spending most of the year in hibernation, the CBOE Volatility Index is back,” writes Ron DeLegge at ETFguide. Wall Street’s fear gauge has soared more than 25% over the past seven trading sessions and could provide a hint of what’s in store for investors in 2013, he said.

“While it’s still too early to determine whether rising volatility will morph into a longer-term trend, the short-term trend is up. And like a sleeping giant, the VIX is starting to move,” DeLegge wrote.

Overall trading volume in the market Thursday was unusually elevated for a traditionally slow week.

“The week between Christmas and the New Year is historically the lowest dollar volume of the year. Today’s volume however absolutely crushed the volume record of any day in between Christmas and The New Year going back to 2008,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital, in a note Thursday.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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