Skip to content




VXX Outperforms the VIX

There are numerous articles on the profitability in shorting the Ipath S&P 500 VIX Short-term Future Exchange traded note, A.K.A VXX.   Some investors who thought this was a fool-proof strategy will be scratching their heads about the stellar two month performance of VXX:

 

VXX outperforms the VIX!

The key performance reasons have been 1) rising levels in all of the VIX futures contracts and 2) the movement from contango to backwardation.

When the VIX futures curve is in contango, the VXX ETN continously buys a futures contract that ages, rolls down the curve, and loses value.  When the VIX futures curve is in backwardation the opposite process happens – the ETN buys a futures contract that ages, rolls up the curve, and gains value.

By looking at the last two month spread between the 4th month and 1 month VIX futures contract, we can see that there has been strong backwardation since the beginning of August:

 

Backwardation shown in the VIX futures spread between 1 month and 4 month

The good news if you are short: these periods of backwardation have always reverted to contango in the past and there is no reason that we should expect this time to be different.

Volatility cannot stay at 45% because there would be very few equity investors left to trade if daily moves were expected to be in the 3%+ range.  Even the black boxes need investors to backstop their losses…

 

Posted in Derivatives, Markets.

Tagged with , , .



Copyright © 2009-2013 SurlyTrader DISCLAIMER The commentary on this blog is not meant to be taken as an investment advice. The author is not a registered investment adviser. There is no substitute for your own due diligence. Please be aware that investing is inherently a risky business and if you chose to follow any of the advice on this site, then you are accepting the risks associated with that investment. The Author may have also taken positions in the stocks or investments that are being discussed and the author may change his position at any time without warning.

Yellow Pages for USA and Canada SurlyTrader - Blogged

ypblogs.com