What in the world is going with the Barclays iPath Series B S&P 500 VIX Short-Term Futures (BATS:VXX) exchange-traded note (ETN)? Shares of the VXX ETN are up over 9% today at the time of writing and traded as high as 45% higher during intraday trading. Furthermore, chatter on social media concerning VXX has picked up dramatically. On Stocktwits, mentions of the VXX ticker have risen by more than 300%. So, what exactly is the VXX ETN? And why is it flying higher today?
What Is the VXX ETN?
First, let’s go over the definition of an ETN. ETNs are unsecured debt securities that are issued by a financial institution. The institution promises to pay holders a return that tracks the performance of an underlying index. In the case of VXX, the ETN seeks to track the performance of the Volatility Index, or VIX. The VIX is an index that is widely used by investors to measure expectations of market volatility. The VIX price is based on short-dated S&P 500 options contracts, giving investors clues on a “30-day forward projection of volatility.”
So, why is VXX trading so much higher today? Barclays (NYSE:BCS), which issues the VXX ETN, announced yesterday that it had “suspended the sales and issuance of the shares due to capacity constraints.” The firm expects to reopen the sale and issuance of VXX as soon as it can “accommodate additional capacity.” As of now, Barclays has stated that it does not have the capacity to support further sales. This affects the price of VXX since large banks usually buy and sell shares to keep the price of the ETN in line with its underlying index. With the suspension of new shares, the price of VXX may not reflect the underlying index.
However, don’t take the sudden spike in price for granted. Last March, the VelocityShares Daily 2x VIX Short-Term ETN (BATS:TVIX) plunged by around 60% in four trading days. This was because Credit Suisse (NYSE:CS), the issuer, had reopened issuance of TVIX after a one-month suspension.
Could the VXX ETN Experience a Short Squeeze?
Ihor Dusaniwsky of S3 Partners believes that the VXX could be in line for a short squeeze, calling it a “prime candidate.” The VXX is known to be a heavily shorted entity, even before the suspension of new shares. According to S3, short sellers have lost $198 million this year on short plays gone wrong. Furthermore, Dusaniwsky commented that, “VXX shorts are already teetering … the lack of supply might really put them over the edge.”
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.