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The Pros and Cons of Buying VXX


It's a good product, but why not just get actual options or stocks?

Got asked if VXX is a good proxy to buy volatility.

My answer would be in two parts. If I wanted to buy volatility, I'd buy actual options, like SPY or on individual stocks. Whether you're using VXX as a speculative tool for higher volatility or as a portfolio hedge, I'd much rather just buy puts on something.

But if for whatever reason you want to own a direct volatility product, than yes, I believe VXX is the best one.

VXX is an ETN tracking a perpetual 30-day VIX future. If the VIX future they effectively have to roll a bit into each day is at a premium to the nearer one, then VXX should lose a modest amount over time. So it's not a wonderful long-term holding in that respect. But that's not going to kill the play, either.

Since VXX is only about nine months old, we don't know exactly how well it will track the actual VIX over time. So far, it seems to move about 40-50% of the VIX move on a typical day. But keep in mind, this is very imperfect, as the VIX itself has day of the week, pre-holiday, and other quirks that VXX does not. So you'll get days where one might go up while the other goes down, probably offset by a nearby day where it does the reverse.

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VIX futures are fine too, but I'd only stick to nearer months, and wouldn't hold them anywhere close to the random expiration run off. Which I guess is my way of saying you can just buy VXX instead and not deal with all that.
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