One of the glaring items from Monday’s market meltdown was that the VIX, often referred as the “Fear Index” closed above 20 for the first time this year.
Actually, the VIX closed at 21.44, its first close above 21 since December 2012. A sharp increase in volatility is often viewed as a negative by many investors, but for Connecticut-based VelocityShares, issuer of a suite of volatility exchange traded notes, soaring volatility is not such a bad thing.
Traders have been pouring into the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV), noted VelocityShares Chief Investment Officer Nick Cherney in an interview with ETF Trends. Monday’s volatility surge prompted traders to increase their bets against XIV, which itself is a bet against volatility. [Inverse VIX ETNs Hit New Highs]
By the time the closing bell sounded Monday, turnover in XIV was nearly five times the daily average. In dollar terms, XIV traded about 3.5 times its trailing 90-day average, according to VelocityShares.
“When volume spikes, we see the most interest in XIV,” said Cherney. “We saw a 60% increase in shares outstanding in XIV in January.”
XIV, which more than doubled in 2012 and again in 2013 as volatility slid, is a play on VIX futures that are at the front end of the futures curve, meaning the ETN is more prone to be whipsawed as volatility increases, notes Cherney. XIV is also currently in backwardation, the scenario where as expiration date nears, futures contracts rise to higher prices than where they resided when expiration was further out.