With the Chicago Board Options Exchange Volatility Index, better known as the VIX Index, nearing year-to-date highs we would expect short selling in VIX related ETFâs and ETNâs to not only be active, but also trend significantly upwards as traders and portfolio managers sell volatility. While we are seeing a slight bump up of VXX ETF short selling over the last several days, we are not seeing the increase in short selling in the remaining eight actively shorted VIX ETFâs\ETNâs that we observed at the start of both 2018 vol spikes.
Shares shorted have increased in 2019 by 34% for the actively shorted VIX ETFâs\ETNâs, but not in proportion to their price drop, causing short interest or âdollars at riskâ to decline by over 21%. Short sellers have not replaced their exposure as prices declined.
In fact, we have seen a dramatic long-term decline in VIX ETF\ETN short interest after balances hit a two year high of $5.0 billion in August 2017. Even as the VIX Index spiked to highs in February/March 2018 and November/December 2018 short interest in the VIX related ETFâs\ETNâs continued their slide. Although there was a slight increase in short interest when both VIX rallies started, aggregate short interest ended up decreasing to $2.2 billion by the end of 2017, $1.5 billion by the end of 2018 and $1.1 billion this year.
Since 2017 shorting VIX ETFâs\ETNâs has been a profitable trade. Shorts were up $955 million, +24%, in mark-to-market profits in 2017 as the VIX Index declined by 21%; were down $116 million in mark-to-market losses as the VIX Index rose by 130%; and are up $593 million with the VIX Index down 23% this year.
We will have to wait and see if a prolonged VIX rally will bring VIX ETF\ETN short sellers back into the market or if the almost two year decline in short interest will continue.
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