VXX and VIX mispricing

Discussion in 'Options' started by akivak, Feb 4, 2010.

  1. akivak


    Did someone try to trade VXX/VIX mispricing? If you look at VIX/VXX chart, you see that VIX outperforms VXX in 90% of cases.

    VXX opened a year ago at 100.11, with the VIX at 42. 63. One year later, VXX is down 68.4% and the VIX is down 42.2%.
  2. MTE


    VXX does NOT track VIX, but the futures on VIX, which is not the same thing. So there is NO mispricing!
  3. akivak


    Well, it doesn’t matter how you call it, but is it tradable?
    VIX front month futures are usually very close to VIX. Lets take today’s prices as an example:
    VIX is 25.3 - up 17%
    VIX Feb. futures is 25.05 – up 13%
    VXX is 31.8 – up 9% only.

    You can create a synthetic in VIX Feb. futures by buying call and selling put, and at the same time selling 80 shares of VXX. Total margin required: about $1,900.

    As I write this:
    The call would be up $125;
    The put would be up $165;
    80 shares of VXX would be down $212.
    Total profit: $78 or 4% on margin.
  4. MTE


    The investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.
  5. VXX, USO, UNG, etc are AWFUL.

    Be sure to do your homework before entering positions. Most likely you will be VERY disappointed with the way they track their respective benchmark.
  6. akivak


    This was exactly my point - long VIX short VXX.
  7. heech


    Why create a synthetic in the futures with the options? Why not just trade the Feb futures?

    Anyways, I'm doubtful there's any arbitrage or "mispricing" here. VXX will probably do worse than the VIX as long as the markets expects lower volatility in the future, thus March futures are falling faster than Feb futures. You probably could've gotten the same effect by trading the calendar spread on the futures.

    It will be exactly the other way around when expectations are for greater volatility in the future.
  8. MTE


    The point is that there is no mispricing. Just because the market is in contango or backwardation doesn't mean the first or the second month is mispriced with respect to the spot.
  9. I'm not even sure VXX tracks the VIX futures all that closely. I've been trading VIX Feb futures (VXG0) the past few days, watching them, March futures, and VXX simultaneously. VXX tracks the front two months' futures only approximately. For example, over a few minutes around 15:30 yesterday VXX (which is ~ $33) dropped 20 cents while VXG0 and VXH0 (~$26) dropped a nickel. And it's not unusual for the Feb futures to move up or down 10 cents (2 ticks) without VXX moving at all.

    I have only glanced through the prospectus (one of the links at http://www.ipathetn.com/VXX-overview.jsp ), but maybe VXX's intraday price is based on something in addition to the front 2 months' futures, or maybe it's just supply and demand at work (VXX's volume dwarfs that of the front 2 months' futures by a factor of 1000, or by 100 if you compare based on notional value), similar to the way UUP sometimes veers away from the dollar index because of perceived issues with the fund itself.
  10. VXX is a scam. If you traded the way had mentioned, you would have to be sure to roll your positions into the next month every couple of days on a rolling basis. I.E. feb into march.
    #10     Feb 11, 2010