If you trade long enough, you’ll see everything. Including (gasp) an actual rally in the iPath S&P 500 VIX Short Term Futures (NYSE: VXX).
Yes, from a low of 30.5 on Tuesday, the world’s least-loved ETN actually lifted to 33 within two trading days!
I have posted all that’s wrong with VXX way too many times, but that doesn’t mean you can’t ever own it. Or, more accurately, trade it off the long side. In fact I am doing that as we speak, though I’m using it as a short term portfolio hedge on an ugly looking week (as opposed to real bullishness on volatility).
You need to look at VXX as you would a simple put. Both work if the underlying moves in your favor directionally. But both will erode over time, albeit for very different reasons. A simple put has … simple time decay. As expiration gets closer, the value of the put declines. You will lose money unless the underlying has dropped enough to offset the time decay.
Likewise VXX erodes over time for a different reason. In order to maintain constant 30 day duration, VXX has to sell near-term CBOE Volatility Index (.VIX) futures every day, and buy futures in the next cycle out. And if that secondnd cycle out carries a premium to the first cycle, VXX will keep losing a bit each day.
But VXX can rally too, if the underlying rallies. And in this case, that’s the underlying VIX futures that it owns. Right here, right now, VXX basically owns February VIX futures. And Feb VIX futures carry a modest premium to VIX itself, low 19s vs. mid 18s. If VIX itself keeps lifting, Feb VIX futures will track a decent portion of that lift from here. And that in turn will carry VXX higher.
Now mind you, VXX won’t track the entirety of any further VIX rally. That’s because VIX futures will start trading at discounts as soon as traders figure the VIX rally will not linger. So if you see VIX pop to 25, don’t look for a commensurate percentage rally in VXX. In fact it may only track about half the VIX lift. But still, that gets you near 40 in VXX. In a name that’s lost 93% of its value in two years, that’s nothing to sneeze at.
Do I expect anything of this sort to happen? Who knows. We get sporadic VIX pops. If you expect one, there’s nothing wrong with gaming it via VXX, just don’t overstay at the party.
Follow Adam Warner on Twitter @agwarner.