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Now's Not the Time for Bearish VXX Moves


It's looked exactly this "cheap" 27 different times along the ride down.

I got asked on Twitter whether I think VXX is a buy.

Short answer? No.

Long answer? More complicated.

VXX tracks a perpetual 30-day VIX future. I'm not 100% certain how they create VXX, but my presumption is someone along the chain has to literally rebalance futures/swaps each day. And if futures are at a premium -- as they are now -- that feels like a recipe to underperform by the same principle that United States Oil (USO) can't keep up with actual crude. It's different in that USO rolls once per cycle, while this must do some every day.

In addition, VIX futures have a premium to the actual VIX. Though that has persisted for a few months now, there's no particular reason that should continue. As has been demonstrated numerous times, volatility remains modestly overpriced to realized volatility. It's less so now that the VIX has drifted, but all that means is the VIX is closer to fair now -- not cheap, per se.

Finally, take a look at the chart below. Why exactly should this be the moment to bottom-fish VXX? It's looked exactly this "cheap" 27 different times along the ride down. I understand the myriad reasons to do something bearish: We've moved too far too fast, the real economy stinks, it's time to lock in gains, yada yada yada. I'm a short-term trader, so I'd rather miss the top and do bearish things later on, but I can't argue with someone with a different time frame, different goals, et. al. But there are much better ways to make bearish bets, in my opinion -- like simply writing calls or buying puts against winners.

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