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Advanced Trading: Exposing the VXX to Understand Volatility Contango and Time Decay


A deep dive into the VXX volatility: How the dynamic allocation and active rebalancing of the VXX creates a trading vehicle to take advantage of declining volatility and/or even a rising/flat stock market.

In order to get an even closer look at this effect I have also provided comparison charts for each year respectively since 2009.

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Note: VXX vs VIX 2009 under performance of -15.66%

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Note: VIX vs VIX 2010 under performance of -42.93%

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Note: VXX vs VIX under performance 2011 of -22.59%

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Note: VXX vs VIX 2012 under performance of -43.07 %

Barclays has attempted to stem the perpetual decline by reverse splitting the fund, but this, in my view, simply extends its shelf life. This will let the decay continue all over again until the VXX drifts back into the single digits where Barclays will reverse split again and…wash, rinse, repeat, around the merry go round we go. The inability for the VXX to provide a long-term hedge against fat tail risk should be very clear by now. The next question regarding this anomaly is how can a trader possibly benefit from this?
Position in VXX call options and CBOE VIX options.
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