Carnage in VIX Powers On

by Adam Warner | March 24, 2011 12:03 pm

The carnage in the CBOE Volatility Index (CBOE: VIX[1]) powers on. On March 16, options trading[2] investors noted it closed above the upper Bollinger Band, and 35% above the 10-day Simple Moving Average. On March 24, we haven’t quite hit the lower B-Band yet, but we do now sit about 17% below the 10-day SMA. Add it up and its the steepest drop in VIX since recovering from last May’s Flash Crash volatility spike.

And of course the VIX drip translates into VIX derivatives. The 30-day VXX future has pared 20% of its value in a week (plus today). Volume hit an all-time high of over 60 million on March 16, while today looks like it will struggle to hit even a third of that.

What’s more, VXX’s old nemesis, Contango, has returned. VXX has to roll out futures to maintain its 30-day duration, and loses money each day if it has to pay up for the future it buys. It currently must roll April out to May (or a swap equivalent) and that spread has gone from negative, to near flat, to $1 in the course of the week. So ironically the worse VIX gets, the greater the uphill climb VXX faces.

At one time the four to seven month future VXZ provided a safer haven from VIX ETN math as it does not face the Contango issue because of its time frame. Yet it acts almost as poorly. Quite simply, the world does not perpetually anticipate a volatility lift “someday” to the extent it did before. Outer month VIX futures didn’t get much beyond 25 while VIX shot over 30, and now they sit in the mid 23 range.

I do think VIX got hit too far too fast, and if that’s the case, VXX and VXZ will pick up again somewhat. But its an uphill fight for now.

Follow Adam Warner on Twitter @agwarner.

Source URL: https://investorplace.com/2011/03/carnage-in-vix-powers-on-vxz-vxx/

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