Levered and Inverse Vix Etp Option Contract Adjustments: No Harm, No Foul?

Accounting and Finance (Forthcoming)

30 Pages Posted: 11 Nov 2020

See all articles by Angel Tengulov

Angel Tengulov

Vanderbilt University - Finance

Robert E. Whaley

Vanderbilt University - Finance

Date Written: August 17, 2020

Abstract

The terms of exchange-traded stock option contracts are usually adjusted when corporate actions take place. These adjustments are made to safeguard the value of the outstanding option contracts. Recently, a new type of corporate event has appeared—levered and inverse exchange-traded product issuers are reducing leverage ratios with increased frequency. While such changes directly affect option values, no contract adjustments are made, resulting in windfall transfers of wealth from outstanding long to outstanding short option holders. In one instance alone, the transfer was more than USD 100 million. To remedy the problem, we offer a simple contract adjustment procedure.

Keywords: levered and inverse ETPs, option contract adjustments, wealth transfers

JEL Classification: G10, G13, G23, G28

Suggested Citation

Tengulov, Angel and Whaley, Robert E., Levered and Inverse Vix Etp Option Contract Adjustments: No Harm, No Foul? (August 17, 2020). Accounting and Finance (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3675565 or http://dx.doi.org/10.2139/ssrn.3675565

Angel Tengulov

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Robert E. Whaley (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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