Barclays Move Leads to Wild Swings in Volatility Product

Barclays said Monday that it was suspending further issuances of VXX and another exchange-traded note, the

iPath Pure Beta Crude Oil ETN,

which goes by the ticker OIL, because it doesn’t have “sufficient issuance capacity to support further sales from inventory and any further issuances of the ETNs.”

It was unclear what led to the Barclays move, which triggered some unusual trading in the ETN. Since the bank’s announcement, a gap has emerged between the value of the note and its holdings, and some analysts warned that it could be riskier than usual to trade the product in coming days. It closed Tuesday at $28.70, about 5.5% above its net asset value. It edged lower after paring early gains Wednesday. 

The bank is basically saying, “the thing that we’re selling, we don’t have any more of. We’re not offering it anymore,” said

David Slovick,

a partner at law firm Barnes & Thornburg. 

The fund, which tracks futures contracts tied to the

Cboe

Volatility Index, or VIX, typically rises when stocks are falling and markets are growing more turbulent, making its surge Tuesday when stocks were climbing unusual. Some of the note’s biggest percentage gains in history have occurred when the broader market is falling, such as during the onset of the Covid-19 pandemic. The S&P 500 jumped 2.1% on Tuesday, snapping a three-day losing streak. 

Many traders have been drawn to these products because they offer a chance at explosive returns, but they come with big risks. Some traders use VXX to hedge other parts of their portfolios, or to make a bet that volatility across markets will fall. They can notch big gains, or losses, in a single session as volatility rises or falls. VXX is one of the biggest and oldest volatility products. 

Some traders said the giant move in the share price intraday appeared to be driven by traders having to close out their bearish bets on the note, leading to a squeeze higher in the price. Data from S3 Partners shows that borrowing costs on the exchange-traded note ticked higher and the exchange-traded note had been heavily shorted this year.

Matthew Tym,

head of equity derivatives trading at Cantor Fitzgerald, said traders who had bet against the product by borrowing the shares may have to unravel their positions as the product grew more scarce, making it more costly to borrow the shares. That could lead to a squeeze higher in the price. 

Options activity tied to the note was also elevated. Some of the most actively traded options were bullish calls tied to the note jumping to $40 or $35, up from $28.70. Also in the mix: calls tied to VXX jumping to $70. Calls give the right to buy shares at a specific price, by a stated date. 

“The premiums on the options are just through the roof right now,” said Mr. Tym. “The implied [volatility] across the board in the product went up.” 

In the long term, the note tends to lose money because of the cost of continuously buying and selling futures contracts. These products are notoriously volatile and though they have surged in popularity in recent years, there have been some high-profile implosions tied to volatility exchange-traded notes.

Write to Gunjan Banerji at gunjan.banerji@wsj.com