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Why Isn't VIX Underperforming VXX?


Some possible explanations.

So with a holiday fast approaching, one could reasonably expect some divergence between VIX and VXX. After all, VIX estimates volatility on the SPX options board, and when holidays approach, traders lower bids to account for the slow stretch of time ahead. And that has the effect of lowering volatility in the calculation.

VXX, on the other hand, is an ETN that tracks a VIX future with a perpetual 30 days until expiration. A holiday in a few days means nothing as all this measures is a snapshot VIX reading 30 days from now. In other words, it's a flash-forward to what a trader 30 days from now will anticipate in realized volatility 30 days ahead from there (in other words, January cycle volatility).

I'd thus expect to see VIX trail VXX, but in fact if anything, it's going the other way. VXX hovers near its lows (they're all-time lows, but remember this product isn't even 10 months old yet). VIX isn't exactly flying here, but it's modestly off the 52 lows and really hasn't moved much since mid-September, whereas VXX has dropped significantly.

Now we know VXX has some tracking issues. They must constantly roll out VIX futures (or swaps) and when VIX futures are in contango, that's a small money loser each time that must add up. We also know futures premiums have contracted in the VIX as traders begin to realize this IS the mean of the VIX, and 2008 is the outlier.

But even given all that, right here right now, VIX should underperform VXX -- and it's not. What gives?

Well one explanation is that if we look 30 days from now, it's slow holiday week ahead then too. Perhaps it's that both products have slow stretches on their minds, just different ones? No way to really know as like I said, VXX didn't exist this time last year.

Another explanation is that longer term volatility assumptions just keep eroding. You can call that complacent or just call that the reality of a slow-moving market. Sell-offs are shallow and brief until proven otherwise. VIX in the low 20s is basically fair historically, and a shade high versus the realized volatility backdrop of this market.
No positions in stocks mentioned.
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