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VXX Is a Hollow Move


Spiking volatility is its only solid ground.

So maybe that VXX isn't such a good idea after all. Don Fishback takes a gander at recent history. He replicates a proxy for what VXX is supposed to do, and calls it Constant Rolling VIX Futures, or CRVF. And has this:

As you can see, the futures, as measured by the CRVF, have tended to be above VIX lately [green line above orange line]. In February and early March, however, the futures were at a discount to VIX [orange line above green line]. You can also see that the futures and the VIX converge every now and then, as they have right now. November futures closed at 24.65 [Tuesday] night, December futures closed at 25.85, which gives us a CRVF value of 24.98 -- extremely close to [Tuesday] night's closing VIX value of 24.83. The good news is that premiums and discounts exhibited by this index closely track what we see in the real world.

So how has the ETF VXX done in comparison to the VIX futures? In a word: horrible! It hasn't always been so. But in the last 3.5 months, the performance of VXX has been devastatingly bad.

On July 8, the VIX closed at 31.30, VXX closed at 74.40, and our CRVF index closed at 31.37 (July futures at 30.80, August at 31.80). As noted above, [Tuesday] night the VIX closed at 24.83, CRVF closed at 24.98, VXX, however, closed at 43.18.

Do the math. VIX down -20.7%, VIX futures down -20.4%, VXX down a horrible -42.0%. And remember folks, this isn't a double-leveraged ETF portfolio. But it's still twice as bad!

I appropriated Don's graph up above, so please click through to see all his other graphs on this, and the balance of his post.

Here's the catch in all this: VIX futures' two cycles out-traded above VIX futures one cycle for that entire stretch. So VXX having to roll each day couldn't come close to keeping up.

But as luck would have it, the volatility times are changing. VIX closed one point above both the November and December futures. A little rally more and the Novembers will pass the December VXX, and should actually do relatively okay in that setup -- though then the complaint will be that it's not keeping up sufficiently with the VIX itself.

If that happens though, it will be the exception. Except for extreme volatility moves, like in 2008, longer-dated options tend to carry higher volatility than nearer ones. VIX futures don't necessarily have to follow suit, but they likely would. So VXX will really only shine when volatility is spiking, and will likely to underperform as Don lays out in most backdrops.

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