Dude, seriously? Every day the ETF manager is buying the second futures for a higher price and selling the first futures for a cheaper price, thus locking in a loss with every rebalance. Think about that for 15 min and tell me how VXX decay is NOT a due to the upward sloping curve.
In my experience, that hedge does not work. You will basically lose money on the hedge every month we don't go down substantially, When we do drop, what is the exit strategy? If you don't take losses on your diversified passive portfolio, you will likely never take the profit on the hedge. I think it makes more sense to place a portion of your assets that you are comfortable always being long and just ignore the market. "Hedge" by making investments in alternative investments that are not tied to the markets short term moves. For me, the long diversified passive portfolio does not work for me. I have seen others do quite well but the timing of when you need the money will tell the win/loss story in the end. Imagine if you needed the money in 2009 vs today. I would have trouble sleeping at night being all in long all the time.
you dont take losses on the diversified portfolio because there is no need to. selling things like stocks, bonds, gold, real estate and going into cash, is an asset management decision. And long-term its likely to be a poor choice given that cash will underform all other assets. I rather own an asset mix that has higher returns and is more robust against different enviroments (a 100% cash guy is taking huge inflation/hyperfinlation risks, he is just not aware of it). the put options are there, for tactical reasons to improve risk adjusted returns (but perhaps to increase actual returns as well). check out Spitznagel's book, he's got some backtests on how that can help a portfolio
For myself, at my age, I have chosen to focus on hedge funds and CTAs that have little correlation to the market. In addition, I keep a block of cash in 1 year CDs for safety. Then I buy 4 week T-bills direct from the treasury so I have just enough “cash” to cover a few months needs. I have no interest in a long only, even a hedged one, portfolio with most of my savings. I can see how that would work for my daughter at her age I don’t have time to focus on full time trading. For most of the members here, I expect trading is a full time job or their part time passion. I expect would is good for me is not good for all. Getting back to trading VX and VXX, I could see a small allocation toward this strategy.
Is the daily roll based on number of contracts or dollar value? Put another way, are X # of front month contracts sold and then X contracts of second month purchased? Or is it Y dollars worth of front month contracts are sold and Y dollars of second month purchased (and thus fewer contracts under contango)?
Is buying SPY here also a lunacy? Being short vol has been the best performer since '08 and continues to be even at these levels. It's sort of a long spy proxy if you size yourself properly which comes with a ton of alpha if you know what you are doing. Plenty of people subscribe to the notion that you sell vol when times are calm or "calming". Implied and forward vols have been rich to realized month after month, year after year. If i am worried about selling vol here it is due to the fact that it has become so mainstream and not the level of vix per se. I cringe every time i hear someone sounding alarms about vol sellers and recommending long stocks in the same breath.
Over the long term, going long SVXY or short VXX makes money 80% of the time. Yes, when volatility spikes, those trades will lose big time. This is why position sizing is the key. We maintain constant exposure to long SVXY position (some members do the same with short VXX positions), but we limit the positions to 5% of the account. The winners make around 20-30% on average, and losers lose 30-40% on average. With 80% winning ratio, it makes it one of our most profitable strategies.
It’s trading the same number of contracts. The index is replicating a “30 day constant maturity futures contract”. To keep that maturity for N contracts, every day they have to sell N/30 of the fist and buy N/30 of the second.