“If this represents a buy on the dips philosophy – hoping for a snapback uptick in volatility – that feeling may be misplaced,” Edwards said.
Assuming the Eurozone is moving on from its worst case scenario, “share count in the VXX could suffer going forward,” Edwards added. “The outstanding share count of VXX fluctuates much like option open interest, contingent on the demand for protection… If this demand ebbs and share count contracts with declining fears about Europe, so will demand for the future’s contract roll.”
VIX contracts are used as a “fear” hedge against potential volatility down the road. With less macroeconomic risks in the future, demand for VIX futures will diminish. [VIX ETFs Thrive on Volatility and Risk Aversion]
VXX, the volatility ETN, is trading at a 52-week low. However, the VIX itself is above its one-year low. Why the difference? VXX tracks VIX futures, rather than the spot price. Therefore, the ETN can be hurt by “contango” in VIX futures. [Caveat Emptor — Volatility ETFs]
For more information on market volatility, visit our volatility category.
Max Chen contributed to this article.