What is VXXB & How Does it Work?
On January 29th, 2009, Barclays launched VXX, an exchange-traded note (ETN) designed to track movements in the S&P 500's implied volatility, which is measured by the VIX Index. If you're interested, read our in-depth post on how VXX worked.
VXX was wildly successful with millions of share/note volume each day and extremely active options contracts.
As a formality, Barclays needed to select a maturity date for VXX, which they set to January 30th, 2019, 10 years after the inception date.
What is VXXB?
VXXB is a volatility product designed to give investors/traders exposure to changes in the Cboe VIX Index through near-term VIX futures contracts. Traders who buy VXXB are anticipating an increase in the VIX Index/futures, while trades who short VXXB are anticipating a decrease in the VIX Index/futures.
VXXB was introduced because VXX just reached its maturity date and can no longer be traded.
Due to VXX's significant success from 2009-2019, Barclays created VXXB, which is essentially the exact same product that VXX was, except under a new ticker symbol.
To confirm that, let's compare the VXX product description to the VXXB product description:
VXX: The iPath S&P 500 VIX Short-Term Futures ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term Futures Index Total Return (the "Index").
VXXB: The iPath Series B S&P 500 VIX Short-Term Futures ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term Futures Index Total Return (the "Index").
The only difference is that they call VXXB the "Series B" product, which makes sense because VXX was the original (Series A) product.
What is the S&P 500 VIX Short-Term Futures Index Total Return?
In order to understand exactly how VXXB works, we need to understand the "S&P 500 VIX Short-Term Futures Index Total Return," or the "Index."
On the VXXB information page, the S&P 500 VIX Short-Term Futures Index is described:
The Index is designed to provide access to equity market volatility through Cboe Volatility Index® (the "VIX Index") futures.
The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index.
Long First and Second Month VIX Futures?
The VIX Index measures a constant 30-day weighting by using multiple SPX options expiration cycles. Since there isn't an exact 30-day expiration cycle on every single trading day, Cboe uses the following methodology to calculate a constant 30-day implied volatility using SPX options:
"Only SPX options with more than 23 days and less than 37 days to the Friday SPX expiration are used to calculate the VIX Index. These SPX options are then weighted to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index." - Cboe
As mentioned earlier, VXXB tracks the S&P 500 VIX Short-Term Futures Index, which tracks the first and second month VIX futures contracts:
The S&P 500® VIX Short-Term Futures Index utilizes prices of the next two near-term VIX® futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts. This results in a constant one-month rolling long position in first and second month VIX futures contracts. (source)
VXXB's goal is to track the daily percentage change of a 30-day VIX futures contract. Since there isn't a VIX futures contract with 30 days to settlement on each trading day, they use the first-month and second-month VIX futures to achieve a 30-day weighted VIX futures contract.
One-Month Weighted VIX Future Example
As an example, consider the following VIX futures contracts:
First-Month VIX Future: 15 Days to Settlement / Current Price of 15
Second-Month VIX Future: 45 Days to Settlement / Current Price of 16
In this particular scenario, the S&P 500 VIX Short-Term Futures Index would use a 50% weighting in each VIX futures contract to come up with the 30-day VIX futures contract:
(15 Days x 50% Weighting) + (45 Days x 50% Weighting) = 7.5 + 22.5 = Weighted 30 Days to Settlement
The calculated price of the 30-day "synthetic" VIX futures contract would be 15.50:
(15 x 50% Weighting) + (16 x 50% Weighting) = 7.5 + 8.0 = 15.50.
Just like VXX did, VXXB tracks the daily percentage change of this one-month VIX futures contract.
For instance, if this hypothetical one-month VIX futures contract went from 15.50 to 16.50 (+6.45%) on this particular trading day, VXXB would increase by 6.45%.
On the other hand, if the one-month VIX futures contract went from 15.50 to 14.00 (-9.68%) on this particular trading day, VXXB would decrease by 9.68%.
Please keep in mind that this is a hypothetical example, but it accurately describes how the one-month VIX future is calculated and where VXXB's returns come from on a daily basis.
VXXB vs. Near-Term Futures Example
To illustrate VXXB's movements relative to the VIX Index and near-term VIX futures, we plotted recent VXXB price action against the VIX Index and futures:
In the above image, we're looking at VXXB (top line), the VIX Index (dashed line) and the first- and second-month VIX futures at the time (January 2019 and February 2019).
As we can see, the VIX Index increases significantly in the December 19 - 24 time period, which "pulls" the Jan/Feb VIX futures higher. It's important to note that VXXB's increase is caused by the increase in the January and February VIX futures, not the VIX Index itself.
Also, the chart above only shows the price movements in points, not percentages. Over this period, VXXB is tracking the daily percentage changes of the weighted 30-day VIX future, which is derived from the January and February VIX futures on each trading day.
Once the January VIX future settles, VXXB's movements will then be derived from the 30-day VIX future that is calculated from the February (first-month) and March (second-month) VIX futures.
The process repeats indefinitely over time.
Expected VXXB Performance Over Time
The sections above outline the specific details of how VXXB works. To explain everything concisely, remember the following about VXXB:
1) VXXB tracks the daily percentage change of a one-month VIX futures contract that is calculated using the first-month and second-month VIX futures contracts.
2) If the first-month and second-month VIX futures decrease, VXXB will lose value.
3) If the first-month and second-month VIX futures increase, VXXB will gain value.
It's important to understand that from VXX's inception date to maturity date, the product underwent numerous reverse splits to keep the product's price from reaching $0.
Under "normal" market conditions, the VIX Index is typically below the near-term VIX futures contracts (a state of "contango"). As time passes, VIX futures contracts slowly converge towards the VIX Index. If the VIX Index is below the near-term VIX futures, the contracts will lose value over time, leading to losses in VXXB.
Conversely, when the VIX Index is above the near-term VIX futures (a state of "backwardation"), the contracts will gain value over time, which leads to appreciation in VXXB.
From VXX's inception date (January 2009) to maturity date (January 2019), the product lost 99.99% of its value because the VIX futures are usually in contango.
Going forward, we should expect VXXB to follow the same depreciation towards $0 over the long-term.
With VXX being such a successful and actively traded product (both the "shares" and options), will VXXB experience the same success?
Since VXXB just took over and VXX is now gone, we should see the trading activity from VXX shift into VXXB.
As of today, January 30th, 2019, VXXB's liquidity is already substantial (click on the image below to enlarge it):
Trading Software Used: tastyworks
In the image above, we can see that many of the VXXB options in the 44-day expiration cycle have open interest in the 1000s, and the VXXB volume is 8.28 million about three hours after the opening bell.
Before trading VXXB options, be sure to check the open interest of the options you're thinking of trading. It's advisable to trade the options where the open interest is in the 1000s. The higher the better.
Additional VXXB Resources
Hopefully, this post has helped you understand what VXXB is and how it works on a daily basis.
For more information regarding VXXB, refer to the following resources: