Thursday, October 22, 2009

Disappointment Lurks as Volume Surges in VXX

At the beginning of the month, when I penned Why VXX Is Not a Good Short-Term or Long-Term Play, I figured that would likely be my last word on the subject. Well, I haven’t changed my mind, but I saw myself shaking my head more than a few times yesterday, when the volume in VXX surged to a new record, obliterating the old record by 50%.

Perhaps this time around the new VXX longs were expecting something different, but yesterday’s numbers just reinforce my earlier points. Sure, VXX gained 1.87% on the day, but the VIX gained 6.32%. In other words VXX longs participated in less than 30% of the VIX spike.

Moves like yesterday illustrate some of my thinking about why VXX is not a good short-term volatility play. As I have noted in the past:

“The VXX juice factor (VXX movement as a percentage of VIX movement) shows just how disappointing the performance of VXX relative to the VIX is when the VIX spikes. The bottom line is that when you need it most, VXX is at its worst in tracking the VIX.”

When it comes to speculative or hedging plays using volatility products, VIX options (or futures) are typically the best choice. For short volatility positions, particularly when you see a VIX spike, think about shorting VXX. Those who favor long VXX positions have the odds stacked against them.

For more on the shortcomings of VXX, readers are encouraged to check out:

[source: StockCharts]

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