Olympia's avatar
$120.5m follower assets
$VXX is not the VIX
$VXX hit an all-time low today of 11.85

The VIX Index marked 18.88 at the close, nearly 2x it's pre-pandemic low of 8.56

This is a great opportunity to remind everyone that $VXX is not the VIX Index.

VIX Index
  • CBOE Index; not tradable
  • Measures the market expectations of volatility (implied volatility) in the S&P 500 over the next 30 days, calculated using the prices of calls and puts in the S&P 500.

  • Exchange-traded note; tradeable
  • Provides exposure to the S&P 500 VIX Short-Term Futures Index Total Return, an index that offers a daily rolling long position in the 1st and 2nd-month VIX futures contracts, weighted to deliver a 1-month maturity.

VIX futures reflect the market's expectation of the level of VIX on various expiration dates in the future. When plotted on a chart, we get the term structure of VIX futures, which usually trades in contango, meaning the market expects future volatility to increase. When future prices are greater than spot, owning futures creates a negative roll yield- selling a shorter-dated contract at a lower price and buying a longer-dated contract at a higher price- resulting in an immediate loss.

Because $VXX provides exposure to short-term futures on a steeper part of the futures curve, it suffers from a greater negative roll yield. In other words, as long as the VIX futures curve is in contango, $VXX is designed to decay in value. This means trading $VXX should be done with caution, on expectations for a catalyst that might cause future vol to spike quickly in the near future. Over the long term, "buy and hold" $VXX is generally a losing game.
Jon Gall's avatar
That negative roll yield can be brutal! I wish there was more long volatility products for retail 😕. I’ve experimented with $TAIL before trying to build a long term portfolio with a long vol kicker (Christoper Cole’s Dragon Portfolio) but haven’t had much luck. Seems like the VIX relationship is too hard replicate without advanced options trading.
Olympia's avatar
@jongall45 agreed on all fronts! I usually stick with super short dated upside call/call spreads to limit the decay. I’m tempted to put on some small upside here 👀 Between higher yields and Biden putting Corp tax hikes on the table, think there’s some potential for the tax hike to bleed into the broader market / big tech names. Certainly big tech cos are best equipped for a tax hike, but to the extent that the administration cracks down on the sector as its expressed its wanted to in the past, that would take vol higher short term. Nothing for certain, but something I’m watching.
Gannon Breslin's avatar
Greta post! 😊