Are you long VXX and thinking it's the VIX? We need to talk. It's down about 99% over the past many years. Why? VXX is effectively designed to trend to zero because of the way it's structured.
It's a product based on VIX futures, NOT the VIX that you know and love. The futures curve shape is in contango most of the time, upward sloping and in a state of calm. Not all of the time, but most.
Moreover, the VIX futures curve can be in that calm and quiet state for looong periods of time. Low volatility clusters very well, meaning it can stay that way for very long periods (2024 case in point).
The product tracks an index that aims for a constant long 30-day VIX futures price exposure by combining the 2 front-month futures. And in a calm market it's effectively buying the more expensive future at a high price and selling the cheaper one lower. Losing money. Over and over. Day after day.
It's volatility gravity at play as futures collapse into VIX. And like with a black hole, the gravity can be strong and relentless when markets are relentlessly calm.
So most of the time it 'rolls' itself into oblivion. It can't help it. When you own this thing, most of the time it's like pushing a boulder up a hill.
"VIX went up but my VXX didn't?" Yup, on smaller moves in the VIX the futures are often unimpressed and will absorb the VIX move - futures have a headstart as they trade higher than VIX.
Is VXX broken? No, it's doing exactly what it's meant to do. Think of it like rolling cheap out of the money puts in the SPX. Most of the time they go to zero.
A better time to consider owning it, but only for shorter periods, is when the VIX futures curve is more flat or inverted, because then:
👉The structure isn't hurting you, in fact it may be helping you if the product is buying for less than it is selling. Curve is inverted and/or backward with VIX above futures. Upward gravity. It has pulled away from the black hole, temporarily.
👉Something is worrying markets and VXX will often be more reactive to market selloffs in this state.
So can it work? Yes, in sustained fearful markets it can do well. In small dip markets not so much. VXX needs to be 'impressed' with a selloff before it significantly wakes up.
For the reasons mentioned above it is not considered a good long-term hold.
Where can you monitor the shape of the VIX futures curve?
Not advice. Don't touch these things until you understand them FULLY. Gamma can help you with that, and many option-selling strategies like cash-secured puts, covered calls and even sensible long-option approaches. Ask about our Covered Call and Cash-Secured Put Overlay Management Programs. We can transform the way you or your practice thinks of these strategies.
Comments