Saqib Ahmed Iqbal

NEW YORK, (Reuters) – Kris Sidial was a cofounder of volatility arbitrage fund The Ambrus Group. He told investors that the firm bets on extreme volatility-tracking notes prices moving in excess.

The firm acquired deep-out-of-the money call options on iPath Series B, Short-Term Futures ETN – relatively cheap contracts that could make little but would be worth a lot if the stock price rises.

VXXX shares rose as high as 60% in the last week of trading, and this was just two days.

Sidial stated that the firm has a range of $35 to $55 millions to close its VXX positions. Although he declined to discuss the trade details, Sidial said that the firm had experienced double-digit percentage gains during VXX’s growth.

VXXX shares surged again on Tuesday. This was a day after British bank Barclays (LON.) announced that the company had stopped selling and issuing shares due to limitations in its capacity.

Sidial believes that Cboe Options Exchange’s November decision to expand trading hours on the Cboe Volatility Index Options to 24 hours per business day was a good move to drive higher price swings among ETNs trying to track volatility.

He wrote investors, in a Nov. 22 correspondence seen by Reuters: “Call buyers on derivatives of these exchange traded product may get very fortunate,” he stated to them.

The volatility in global financial markets has increased sharply, with large price swings in commodities and stocks, due to the Russia-Ukraine war, which has spook investors. Additionally, the U.S. Federal Reserve is set to increase interest rates for only the third time in the last three years.

Analysts predict that VXX shares may still be subject to wild price swings because the ETN’s indicative price is far lower than it actually should be. This would result in the ETN being traded at a higher price than its value.

Large banks typically buy and then sell shares to maintain the ETNs’ indicative value at a trading price.

The suspension of new shares can cause problems. VXXX traded up to $14 above its indicated price on Tuesday. VXX shares closed at $28.70, a flat close and up 9.9% in the past week.

This is basically scarcity value. Matt Thompson is the managing partner of Thompson Capital Management in Chicago, an investment advisor that specializes volatility trading.

Thompson said that Thompson’s company, which was “some exposure to VXX”, sold the entire thing on Tuesday.

He stated, “We don’t want to stay around when/if the start issuing shares again.”

Some investors claimed that the wild movements in VXX recently brought back fond memories of VelocityShares Weekly 2x VIX Short Term ETN. In March 2012 VelocityShares was the issuer and the ETN collapsed by nearly 60% during four trading sessions. Credit Suisse (SIX :), After a one-month suspension, shares have been reopened.

VXXX investors who had a bearish perspective are suffering sharp losses following the ETN’s rise.

SHORT TIME?

Sidial and others worry about possible price movements in ETNs. Price stability for these products is dependent on the capacity of authorized participants (APs – usually large banks) to efficiently buy and sell shares.

Even though shares have not been stopped, APs occasionally find it difficult to stabilize the price, since liquidity can dry up in times of market stress.

Sidial stated that the possibility of trading at any hour could increase volatility. Market participants can react instantly to negative news and often make it worse during market shocks.

The Cboe has in the past said the ability to trade S&P 500 and VIX options nearly around the clock would help investors manage risk more efficiently.

Sidial stated, “This is something that we’ve been following for quite some while.”