-27%
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Makes sense… it was up over 50% yesterday I think…
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It is still elevated, and for shorters of VXX and similar, it is the futures you need to concern yourself with, and they don’t generally spike as high as the VIX itself (because they market won’t bet on a sustained vix of 50) and they also come down slower post-spike.
It is probably a good time to short VXX for those interested. The pro’s are that august futures are priced at 30, substantially higher than historical averages. Next month futures are 25. So thats the down side, next month futures probably won’t fall all that for awhile and the curve is in steep, steep backwardation, meaning decay is very much working against you right now (its not decay, its anti decay).
Last summer we had the flash crash spike in VXX and thte VIX, followed by the monster monday rally when some greece plan was announced, and a couple calmish days after, then another huge VXX spike, a drop as we rallied into that big reversal day when china devalued or something like that, a spike, etc.
It was the first low that had the highest spike in VXX, quite like 2008/2009. The market was much lower in march, but the VIX was much lower also.
It is a fundamental reality that these contango-prone ETNs suffer one frustrating trait:
-when their decay rate is highest is when the underlying is priced low, meaning mean reversion tends to not be on your side
-when mean reversion or price correction is most on your side, their decay rate tends to be lowest.
This has been true of both VXX and oil over the last couple of years, among others.
There is never a perfect time to buy or sell these things, and they are always risky.
In my view the safest play for those wanting to short VXX now is the selling of above the money long dated calls on the thing, like jan 2013. For these reasons
1. Thats a very long time from now and to win on that trade you don’t need a rally or new highs or anything, you just need some calm in the market or even just a 2 or 3 week relief rally. The premium in them plummets (I have followed them since their inception) as the markets calm. Earlier this year I got 70% of the premium out of some VXX Jan 2013 calls in probably 6 weeks. The markets calmed and VXX dropped.
From here, VXX and shorting it could play out like any of these:
1. the markets crash anew, the vix spikes anew, this goes on for a couple months, VXX goes into backwardation for an extended period of time (something that didn’t really happen in 2010, it went into backwardation for much of the may period, but never as steeply as this (20%, even worse yesterday). In that case VXX ccould go significantly higher.
2. the markets rally to somewhere, crash to re test, rally again, and crash to retest, rally again, ala summer of 2010. In this case the VXX may well have seen its high (as it tends to be the first crash that has the highest vix readings) and it may be very tradable.
3. the (if you read into it) implied coming of QE3 written quietly into todays comments causes a market rally that lasts a few months, ala the ones we’ve seen in the last few years. In that case we should fall into steep contango and VXX from here would be a good short.
So anything is possible, mean reversion is on short sellers side right now but decay really, really isn’t. Thats the big difference between now and last summer…. Last summer we never saw anything like this level of backwardation, and it is a threat to short sellers.
To add some clarity into the generally profitable and occasionally terrifying habit of shorting VXX, for haters of broken ETFs everywhere…
The things you have to keep an eye on are
1. contango/backwardation in the VIX futures curves. Its almost always in contango (something like 80% of the time) and that is what causes the decay. Right now its in fairly steep backwardation, that is bad for short sellers. Most of the year it has been in impressive contango. 2-3 days of calm may be needed to restor contango to the curve.
2. the actual level of the first and second months of vix futures. these tend strongly to not spike as high as the VIX, nor drop as low. For example when the VIX was 13, front month futures were probably 15-16 and second month 18. But VXX decayed for months at that kind of level due to the contango.
So for now, I think its a good short, but with an itchy cover trigger as the backwardation is troublesome. August futures expire in 1 week, so they aren’t likely to fall dramatically below the actual VIX over that time.
The far end of the VIX futures curve never swelled as drastically as it did last year, and as a result we are not set up for as dramatic of a decline in VXX as we were then at this time.
something to keep in mind.
but, if you have a short VXX as a sort of small side investment position, rest assured it will make its way to about 50 cents from here by 2019 when it expires.
so short long dated, above the money calls while the premium is still rich (double decay, time, market VIX, and decay in VXX all work to help these, and you have a cushion of time and strike price to increase the odds of a successful trade), or long puts or synthetic puts. Too much backwardation (this is different than last summer) to really justify enormous bets on the short side without hedge.
Checklist, thanks for posting your observations about VIX and VXX.
my pleasure. its a lucrative and attractive business…
got to love something with a roughly 50%/year built in head start.
its just very risky at times and in certain circumstances.