I bought some VXX, volatility seemingly cheaper by the day..

Discussion in 'Trading' started by PlusMinus, Jan 14, 2010.

  1. Realizing that VXX is not the perfect vehicle for VIX, considering that a) it is based on and meant to track VIX futures, not index rate, and b) can experience contango. That said, it still has very high negative correlation to S&P and I can see no better way to capture long term inverse exposure to this market without leveraging up in shorts of individual equities. Inverse S&P ETF is not a long term vehicle as it's targeted to end of day returns only.

    Any thoughts on a better way to do this? VIX is still dropping, and my short term thought was to wait for if it hits the 12-14 range and load up on more VXX. I just don't see how the contango leak could work against VXX badly enough before another shoe drops in this market.

    Also, just take a look at the increase in volume in this ETF, there has been a massive renewed interest since the end of December and through this first month of 2010 so far.

    Would appreciate thoughts for against this viewpoint. Obviously if you think the market is headed higher indefinitely, you're not going to see the merit in this approach.
  2. Did you backtest it? The result may be surprising.

    Good luck.

    Attached: Front Month VIX Futures data, Format: OHLC, back-adjusted, weekly bars.
  3. It doesn't work that way. VXX doesn't just hold front month. It has a rolling weighting that is rebalanced daily of front and 2nd month contracts. As each day passes the weighting changes in an effort to combat contango. http://ipathetn.com/pdf/vix-prospectus.pdf

    In any case it is a speculative dabble on my part. I don't have the farm bet on this.
  4. Long Volatility shops have already had a 50% DD this year.

    Mind you they were up 200%+ in 2008.

    I think the volatility trade is profitable in 2010.. however, I think expressing that view through equity and index options is healthier than a VIX standalone bet. But I'm a directional trader.

    Volatility trading from Euan Sinclair may bring up

    I just found this interesting article:


    Should be useful.
  5. Thanks I do have the Sinclair book for other purposes at the moment but I'll look at it in this light as well.
  6. The historical losses of waiting for some "shoe to drop" are gigantic, unless your timing is absolutely spot on. If your timing is that good, why not short ES/SPY outright?

    You claimed the contango can't work against you bad enough, history shows otherwise. Good luck.
  7. Not seeing what you're seeing. You can hold VXX for months and contango won't be bad enough to eat away at the effects of gains from a major market leg down. Just look at the first year of performance from VXX to see this. And again, they are managing contango through a weighted roll on a daily basis. I'm not saying contango can't hurt, but can you suggest a better passive way of betting on a volatile downturn in the equities markets? Look at VIX now, it has only been this low on 4 other Passions, 3 of which have come before downturns. I'm not saying it's guaranteed, but I'm still not seeing a better passive way to trade this.
  8. Let's see some theories on the massive volume increase over the past week as well. That is supposed to be totally accidental?
  9. see volume chart
    • vxx.png
      File size:
      34.1 KB
  10. Stay out of (long) VXX positions unless it makes a new XX week high (see data I posted). Buy on strength, not on weakness.
    #10     Jan 14, 2010