VXX Options… or VXXB?

The VXX was a popular short term volatility Exchange Traded Note (ETN), a debt asset, meaning that it had a maturity. The note matured after 10 years of trading. The options final expiry was this past January 30th 2019. Closing price $38.32 and $449 million in assets. Fear not VXX traders, the VXXB (Barclays version of the VXX) has entered the market to replace the VXX, along with its options!

Barclays first issued the VXX as a “test subject” that would act as a bond which turned out more successful that initially expected.

Whatever VXX options traders held on January 29th 2019 were turned into cash the following day. The shares that were held a week prior to maturity had the option of converting into cash rather than rolling over to the VXXB. Nearly 50% did turn VXX shares into cash. Traders did expect that the near $450 million transition moment would bring some action to the volatility market, ironic, but the transition was rather smooth. Due to low institutional activity in the asset.

Barclay’s data

VXXB storms in

The VXXB was issued to replace the 10 year VXX, due to one main reason. It made Barclays a nice chunk of money. The VXXB was issued with a 30 year maturity with the expectation that the inflow of money would remain constant. The VXX’s assets remained in a $800 million to $1.2 billion range throughout its life, no way Barclays is going to let that wither away. Barclays is no rookie, they revealed the “Series B” a year prior to the maturity of the VXX to give investors and traders time to readjust.

Volume on the VXXB began to creep in a month before the maturity of VXX, in December 2018. Pictured below in the red box.

VXXB on Trading View

Difference between VXX and VXXB

The VXX and the VXXB are virtually identically, they track the same index (SPVXSTR), it has the same free structure (0.89%/year). To add, nether pay period interest, but there is one main difference. The issuer redemption clause in the VXXB prospectus.

VXXB Prospectus from Barclays

The issuer redemption outlines that the issuer of the note may close down the fund without a cause, to do so they must pay shareholders out in cash. This is just a precautionary addition to the prospectus of the VXX, otherwise both assets are virtually identical other than the new VXXB maturity in 2048.

Options trading.

The burning question, if VXX had a maturity what happened to the options? First, the options could not stretch out to expire past January 30th 2019 on the VXX. So how was the transition handled?

The VXXB options were issued with expiry stretching all the way to 2021, which helped the transition moment. But that does not mean that the options spreads on the VXX going into the assets maturity were not out of wack, stretching over $4.00 spreads on strike prices. This prompted traders and investors to use a limit mid-point which caused easy fills. The bid/ask spreads tightened a little more just before maturity and the transition.

Traders can now calmly trade the VXXB options as if they were the VXX.

VXXB options chain

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.