Here's Why The VXX Volatility ETN Is Soaring

On Monday, Barclays PLC BCS announced it would be suspending the sale and issuance of two popular exchange-traded notes (ETNs) due to capacity constraints. After trading in tandem throughout most of 2022, the Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN VXX and the Barclays Bank iPath Pure Beta Crude Oil ETN OIL have diverged in a major way this week following the announcement.

OIL And VXX Explained: The VXX is one of the most popular ways for investors to trade stock market volatility. The VXX tracks the Chicago Board Options Exchange Volatility Index, while the OIL ETN tracks the S&P GSCI Crude Oil Total Return Index.

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Because ETNs are issued as senior debt notes and are not actually ownership shares of an underlying commodity, they are more like bonds than ETFs.

On Monday, Barclays said it currently does not have the capacity to support additional sales of either ETN or issue additional shares, leading market experts to speculate that Barclays may simply be attempting to reduce its risk. It also creates the opportunity for a potential short squeeze, which may have already begun.

Short Squeeze? Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, estimates about 90% of the VXXs shares were held short as of earlier this week. Once share creation stopped, short sellers lost access to a source of new shares to borrow.

Since last week's close, the OIL ETN is down 7.8% while the VXX fund is up 27.5%. The fact that the underlying VIX volatility index was down 2.9% on Tuesday, while the VXX fund was up 10.7% in midday trading, suggests a short squeeze could be in play.

Benzinga's Take: Traders should be extremely careful trying to time a potential short squeeze and any eventual pullback in the VXX. Short squeezes are notoriously volatile and unpredictable, even to some of the most experienced stock traders.