Wednesday, March 4, 2009

VXX Data Now Painting an Accurate Picture

Just one week ago, I posted an earlier version of the graphic below in VXX Juice Factor and Portfolio Insurance Implications. In that article, I explained how daily percentage price changes in VXX (what I call the VXX juice factor) had been running at the rate of about 70% of the changes in the VIX. This was in sharp contrast to the 35-40% my modeling of historical data had led me to expect when I published VXX Tracking VIX at 80+% Today the previous week.

Now, after 22 days of trading, the actual data for VXX have converged with my model and expectations.

Here is a quick summary of the first 22 days, with some takeaways that should prove to be helpful going forward:
  • The median one day percentage change in VXX has been approximately 35% of the change in the VIX
  • 77% of the time the two volatility measures have moved in the same direction (with divergences limited to days in which the percentage changes were small)
  • 14% of the time VXX made a sharper move than the VIX (again, only on days with relatively small changes)
  • On the three days the SPX has dropped more than 4%, VXX has moved 37%, 52% and 76% as much as the VIX, for an average of 55%
I expect these numbers, particularly the 35% and 55% ones, to come very close to matching the long-term performance of VXX relative to the VIX.


[graphic: VIXandMore]
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3 comments:

  1. AnonymousMarch 4, 2009 at 3:26 PM

    Bill

    Will you look at the relationship between a VIX move and a VXX move as an indication of how 'stretched' the VIX is?...if you see what I mean?

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  2. leo00o83March 5, 2009 at 8:46 AM

    Hi Bill,

    Why do you think VXZ volume is so thin and even getting thinner?

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  3. Bill LubyMarch 5, 2009 at 9:50 AM

    Anon,

    Yes I would see something like a VIX:VXX ratio to be analogous to a VIX:VXV ratio -- and a good method for determining how stretched the VIX is.

    Leo,

    Regarding VXZ volume, a couple of reasons. First, if you are looking to hedge and you want maximum 'juice' then the cash/spot VIX or front month futures (or VXX) will give you the biggest bang for the buck.

    The farther out in time you go, the less responsive the VIX instrument will be to a spike in volatility. For this reason, VXZ, which moves at less than 40% of the rate that VXX does, has minimal hedging value.

    -Bill

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