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Tales of a Technician: The VXX Reverse Split

August 23, 2017

By | 3 Comments

I’ve surveyed the masses, and more than a few newcomers to the volatility space are scratching their heads today. And for a good reason. Take a gander at the charts of VIX, UVXY, and VXX and tell me (in true Sesame Street fashion) which of these things is not like the others.

How about that VXX today, eh? Pole vaulted from $11 to $48 in one fell swoop. That’s like a 400% increase. But before you VXX owners boom shakalaka to the bank, take a look at the today’s percentage change: +0.81%

What gives?

This, friends, is what a reverse split looks like. A 1 for 4 reverse split to be exact. Barclays Bank, the custodian for VXX announced the split back on August 9th (see here). By the way, if your charting platform doesn’t show today’s big gap it’s because the chart prices have already been adjusted to the new post-split prices.

If you hold VXX positions and were caught unaware by today’s split, then consider this your wake-up call to learn the product you’re trading before risking your hard-earned dough. VXX is one of the most complicated products on the planet. I’m all for trading it! Trade it every day if you want. But please, take the time to learn what makes it tick. Here’s my list of pre-requisites for traders wanting to dabble with VXX (most of these apply to the other volatility-related products like VIX, VIX options, and UVXY).

  • The dynamics that move the VIX higher and lower
  • The behavior of VIX futures
  • The relationship of VIX futures to the VIX Index
  • How to analyze the term structure of VIX futures
  • Contango
  • Backwardation
  • The daily rolling feature of VXX that causes its performance to differ from the VIX Index

If you don’t understand half of what I just said, then it’s a good bet you need to spend some time to learn volatility markets before dabbling with VXX and crew.

The nature of a reverse split is to raise the price of a stock and reduce the shares outstanding. If you owned 100 shares of VXX at $10 before the split, then you would own 25 shares at $40 after the split. Notice how both before and after the value of your position was $1,000.

Splits don’t change the value of your position. It’s simply some numerical magic designed to modify the share price of the stock.

VXX reverse splits out of necessity. If it didn’t, it would be well below zero at this point. Did you know back in early 2009 when this product first started trading it was at $100? If you look its starting price now, it’s around $102,400. Why? Because we’ve seen five 4-for-1 reverse splits since the fund began.

  • $100 x 4 = $400
  • $400 x 4 = $1600
  • $1,600 x 4 = $6400
  • $6,400 x 4 = $25,600
  • $25,600 x 4 = $102,400

The fact that VXX has had to split five times over eight years just to stay above zero shows you just how inescapable the daily decay has been. That’s why it’s a TERRIBLE buy-and-hold product. It’s just the worst. Now, it is true that it will fare much better during a bear market, but guess what happens when the stock downturn is done? That’s right, VXX begins its suckitude anew.

If you have held options strategies before the split, just remember those will all be adjusted as well, so the net value of your position doesn’t change. Either the number of contracts will change or the multiplier (from 100 to 25). For example, if one contract controlled 100 shares at $10, it now controls 25 shares at $40. Obviously, check with your broker for details.

In closing, I recently hosted a pair of Cash Flow Clubs focusing on the VIX and VXX. If you missed them, take a listen.


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3 Replies to “Tales of a Technician: The VXX Reverse Split”

  1. Rosemarykioko Rosemarykioko says:

    Love it!! Thanks Tyler

  2. Avatar STEWGILGIS says:

    Very interesting – and helpful. As soon as I get rid of my VXX position, I’ll avoid it in the future.

  3. Avatar RichardBlanchard says:

    Lesson learned. Looks like I need to swallow my medicine, wince, and move on. Thanks for clarifying what’s going on there, Tyler.

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