In addition to instruments for measuring volatility, an increasing number of products for the Volatility trading established. One of the most liquid and popular products is the VXX.
In this article you will learn what the VXX is, how its rate is obtained and what properties the VXX has.
What is the VXX?
The ipath Series B S&P 500 VIX Short Term Futures ETN (short: VXX, due to the ticker symbol) is an ETN (Exchange Traded Note), which can be used to trade volatility or speculate on a development of volatility.
The VXX is a portfolio consisting of the VIX futures, more precisely the two front contracts of the VIX futures, whose weighting changes continuously. This means that the contracts contained in the VXX Futures are rolled continuously.
Rolling losses
Rolling the futures (selling the front contract, buying the back contract) results in a rolling loss if the forward curve of the VIX futures is in a contango and not in a backwardation, which is the normal case. (I.e. the longer-dated future is more expensive than the shorter-dated future).
Typical behavior of the VXX
Due to the constant rolling losses, the VXX tends to long-term downwardas can be seen immediately by looking at the chart.
Analysis of the VXX
The VXX can in principle also be used to analyze volatility and/or the stock markets. However, the roll losses of the VXX distort the long-term picture of volatility, which is why traders and analysts mainly use the VIX and the VVIX for analysis.
Trade of the VXX
If you want to trade the volatility or speculate on the development of the volatility, you can
- Speculate on rising volatility
- Speculate on falling volatility
The VXX is not necessarily equally well suited for both purposes.
Speculation on rising volatility
If the implied volatility on the stock markets increases, this results in an increase of the VIX, as well as an increase of the VIX futures and therefore also in an increase of the VXX. The VXX can therefore in principle also be used to speculate on an increase in implied volatility.
However, in doing so, a very good Timing necessary. If the VXX does not increase very quickly, the constant Rolling losses a profitable trade is unlikely. Therefore, many traders use other strategies and products to speculate on rising volatility.
Speculation on falling volatility
To speculate on falling volatility and benefit from the constant Rolling losses the VXX, on the other hand, is very well suited to profit. Unlike the VIX, which has a natural lower limit, the VXX can therefore fall further and further. This is exactly the reason why there is also a regular Reverse Split (share consolidation) of the VXX. (That is, for example, four shares are combined into one, resulting in a price four times higher).
Especially after a strong rise of the VXX, accompanied by a backwardation in the VIX (a reversal of the forward curve of the VIX futures), short trades in the VXX are a popular strategy. In addition to the decline in volatility, one can thus additionally profit from the roll losses of the VXX.
Options on the VXX
In addition to directional long or short trades, there are also Options liquid tradable on the VXX. This gives you the opportunity to Standstill strategies to trade options as Fuse to use a long or short position or to trade more complex option strategies on the VXX.