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Why You Should Use VXX to Speculate on Volatility


VIX just isn't the best speculative tool.

Another VIX "gap" I've observed lately shows a big difference between moving averages: For instance, between the 200-day and 50-day, as shown here.

Click to enlarge

Isn't the reason for this incredibly obvious? The 200-day still includes data from last fall's mad options rush. The 50-day doesn't. But at this point, 80 VIX is ancient history (although Bill Luby suggests that we reverse-split the VIX to get it back there).

As for the implications of this gap, I'm not sure there are any. We know that the VIX tends to mean-revert, so you'd think the tendency would be for it to move towards the longer-dated number. But this is such a unique circumstance, I'm not sure it's anything more than a remnant of the singular environment we lived through.

In terms of what to actually pay attention to, I'm growing more and more fond of VXX. Take Friday, for example. The VXX spent most of the afternoon modestly green with the VIX modestly red. Why? Again, it's because the actual SPX options bids evaporate ahead of weekend decay. The bids return -- in volatility terms -- on Monday.

I believe when we have a few years of VXX data to review, we'll see some obvious relationships between the 2 indices. All things being equal, the VXX will likely move an average of 40-50% of VIX movement, which makes it the best vehicle in my humble opinion to speculate on volatility.

But that average move will be extremely dependent on the day of the week, as VXX will underperform that expectation on the typical Monday, and overperform on the typical Friday.

Will knowing this make you money? Not really, since you can't arb with them, since you can't trade an actual VIX. But knowing this will help you analyze VIX tweaks more intelligently.

And at the moment, we're only seeing tweaks that have little broader meaning.
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