With the CBOE Volatility Index (CBOE: VIX) hitting three year lows, there’s really a good argument to buy a volatility-something. I mean VIX can’t go to 0 … or really even 10 so fast. In fact we likely saw the lows … at least until summer.
And thankfully, we have an ETN to buy, the VXX! Or the iPath S&P 500 VIX Short- Term Futures (NYSE: VXX). And it hits all-time lows on a virtually daily basis.
Well, maybe not so thankfully.
The VXX has lost almost 94% of its value since listing in January 2009. And as we document periodically, it may just continue to dribble away forever, whether VIX makes new lows or not. The VXX tracks a hypothetical 30-day VIX future. To keep constant duration, it rolls shorter futures into longer one’s. When the shorter future trades at a decent discount to the longer one, VXX loses some coin on each roll. And guess what? With VIX itself closing at $15.77 yesterday, May VIX closed at $17.45, and June VIX closed at $19.55.Unless VIX itself picks up some steam here, VXX will keep losing money rolling out for a $2.10 hit, more or less.
This all doesn’t mean you shouldn’t buy volatility in some form now. Even in the VXX form. Just think of VXX like you would a regular put on the S&P 500 Index Option (CBOE:SPX). Depending on the specifics, a put can win big if you catch it right. But if nothing happens, it will decay in a value a bit each day thanks to expiration getting closer. VXX decays too, but thanks to contango and not expiration.
There’s really no such thing as bottom fishing a decaying asset like a put or like VXX. But you can get nice directional wins. Is now the time? Who ever knows for sure. But I would keep an eye on it.
Follow Adam Warner on Twitter @agwarner.