Why doesn't everybody just short VXX?

Discussion in 'Trading' started by GlobalMacro90, Sep 25, 2018.

  1. I'd love to hear some other trader's opinions on this. VXX, Barclays ETN that tracks the first 2 VIX futures contracts, is down something like 99.99% since inception. The reasons are well known:

    1. The VIX futures curve is usually in contango, so when VXX systematically rolls to the next contract (buying a higher priced contract) it erodes the value of VXX.
    2. Implied vol has been shown to consistently be above actual realized vol, making vix futures in general systematically too expensive.
    3. A behavioral reason: people seem to like like being long vol as a "hedge" against a downturn in equities, which creates constant demand for this toxic ETN (even though VERY good arguments can be made that this is a terrible hedge for that scenario).

    This thing has a huge market cap and is very liquid, with a large volume traded each day. The borrow, as far as I can tell, isn't great but isn't terrible, certainly isn't bad enough to make shorting this thing an unprofitable strategy. I am seeing the borrow at about 3% annualized over the last year or so.

    Playing devils advocate, the downside to being constantly short VXX is that it can rip in your face in a huge way. Looking back at the daily data, it looks like the largest 1 day increase in VXX is about 33% (though that is much less than how much the actual VIX ripped that day). The largest 10 day increase with VXX is over 100%.

    Knowing these risks, if you size your short position to say 2-5% of total account value, and you are fine with this ripping in your face 100% at times, this seems like a simple way to make money most of the time. I have run simple trend following methods on VXX (short or flat) and results are very good.

    Anybody have any thoughts on this? Are there risks I am missing?
    Reformed Trader and Shadetree42 like this.
  2. Robert Morse

    Robert Morse Sponsor

    I'd say coming up to early Feb 2018, this was the most crowded trade in years. Big losses during that spike.

    treeman likes this.
  3. destriero


    I am sure that nobody is buying the VIX Jan synthetic long at 15.50 and shorting VXX at 26.35 (or simply buying the VIX Jan 10C). ;)
    Reformed Trader likes this.
  4. I totally understand that this can rip in your face >100% as I mentioned. Even with that risk, if you keep you position small/manageable (literally thinking like 2-3% of portfolio) I think there is some validity in the strategy. I wanted to see if there was something obvious I was missing.
  5. Short vol is back en vogue. Has been for several months. I don't see another feb 5th any time soon. Nothing wrong with selling vol as long as you size yourself properly.
    GlobalMacro90 likes this.
  6. destriero


    Jan VIX is priced to 15.50 with Jan SPX ATM vol at 11.50%. Assume that Jan converges to Sep vol of 9% (best-case) and the smile remains the same. Perhaps 250bp in convergence or 18% gains on short VXX with the potential for a double against you. 5:1?

    Long VIX/VXX to earn 2.50 gross. $460 to buy the Jan $11C; $1350 to short 100 VXX. Netting $2 to you with carry. 13% on haircut.

    VXX traded 10 over cash VIX on Feb 6, 2018. The Jan synthetic (VIX) will trade over cash and the 2/6/2018 move traded within the current swap (1100). It's a solid trade to arb it off. Naked short will likely only earn an additional 50bp--assuming vol remains tame.

    Edit: BTW I consider 250 in convergence as best-case to Jan exp (1100 -> 850).
    Last edited: Sep 25, 2018
  7. short VXX with a 2.7% stop loss if previous day VXX closed lower than 2 days ago and if today's VXX is lower than yesterday

    => 60% annualized return since 2009 without the big losses, 25% drawdown max
    SteveTheSloth and GlobalMacro90 like this.
  8. JSOP


    Plenty of reasons why people can't short VXX or any other VIX instruments:

    1. Forbidden by many stupid brokers who still believe that it's less risky to buy VXX instead of shorting it

    2. Extremely elevated margin requirements on VXX

    3. No available shares to borrow to short VXX. Everybody like you have figured out that shorting VXX is the way so everybody wants to short it but there is only so many shares available for shorting so there is no shares available anymore.

    4. Not allowed to short VXX for their retirement portfolios and whatnot

    All reasons stemming from the market's refusal or inability to learn about VIX products and thus ignorance of VIX products
  9. JSOP


    Nice chart!!
  10. It is, IMO, worth it to be short VXX with a small pct of your portfolio.

    However, the real risk is that all hell breaks loose, the VXX gets squeezed, completely detaches from the VIX and you get bought in at an absurdly high price, wiping out a large chunk of your account.

    The odds are this occurring are not high, but they are also not zero.
    #10     Sep 25, 2018