Time to Back Up the VXX Truck?

• Posted by Adam Warner
• on October 13th, 2009

So 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 am 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 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 month’s now, there’s no particular reason that should continue. As we’ve 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 that chart. 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 sucks, it’s time to lock in gains, 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’s way better ways to make bearish bets imho, like simply writing calls or buying puts against winners.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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