Schaeffer's Trading Floor Blog

Why You Never Buy and Hold VXX

You might be better off with index puts than with the iPath S&P 500 VIX Short-Term Futures ETN (VXX)

by 12/22/2014 8:53 AM
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Remember the iPath S&P 500 VIX Short-Term Futures ETN (VXX)? We haven't checked on our favorite exchange-traded note (ETN) in quite some time now.

VXX, of course, did quite well recently, albeit for a relatively brief time. It hit all-time intraday and closing lows on Dec. 5, then proceeded to rally 32.5% close-to-close over the next week and a half, before peaking on Dec. 16 at 34.63. And then the market explosion happened, and with it the inevitable VXX implosion: it dropped 16% in three sessions.

On the year, VXX is down 29.7%, which actually isn't a terrible year for VXX on its own. Contango in CBOE Volatility Index (VIX) futures always knocks down VXX over time. Thing is, VIX itself is up 20% in 2014, so using VXX as a general volatility or portfolio hedge worked about as well as always. That is to say, it didn't work well at all.

I can put a positive spin on it, though! VXX has hit 316 new all-time lows in its illustrious 1,484 trading-day history; a 21.3% "success" rate. The pace of ineptitude has slowed, though, in 2014, with only 36 new lows in 246 tries (11.39%)! And buying VXX into an overbought VIX has actually worked OK, at least in the very short term. The following table is a VXX-centric version of the overbought VIX table we often run. What happens if you buy VXX on the first close when VIX closed 10% above its 10-day simple moving average and hold for five, 15, or 25 trading days? Here's each play since the invention of VXX in 2009.

VIX 10% above 10-day simple moving average

Keep in mind that VXX almost always declines over time, so negative returns in and of themselves aren't surprising. Buying VXX on overbought VIX and holding for five trading days actually worked well in 2014: four wins in five tries!

Going back for all of VXX history, though, it still hasn't paid off. It incurred a median loss of 4.53% vs. a median loss of 2.24% on any random five-day hold. The average loss is 1.95%, vs. a 1.43% randomly timed purchase and hold. Buying and holding for 15 trading days is worse off of overbought VIX (-10.46% median vs. -7% random median). If you use averages, you get a different story, but that's wholly because of a huge win if you bought VXX on the Aug. 29, 2011 overbought VIX. Out 25 trading days, there's little difference.

As always, the best advice is to never buy and hold VXX. It's fine to play in the very short term. But if you do that, the numbers suggest you are better off anticipating a VIX pop than trying to ride one in progress. Unfortunately, that's almost by definition a crapshoot. So, just stick with good old-fashioned index puts!

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Analyst Update: Gilead Sciences, Inc., Hasbro, Inc., and Mattel, Inc.

Analysts adjusted their ratings on GILD, HAS, and MAT

by 12/19/2014 2:46 PM
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Analysts are weighing in today on drug issue Gilead Sciences, Inc. (NASDAQ:GILD), as well as toymakers Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT). Here's a quick look at today's brokerage notes on GILD, HAS, and MAT.

  • GILD is continuing its blistering run up the charts, gaining 2.4% today to trade at $108.08, after RBC waxed optimistic on its decision to develop and market one of ONO Pharmaceutical Co.'s cancer drugs. The stock has now added nearly 44% year-over-year, so it's not surprising to see speculators taking a bullish stance. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Gilead Sciences, Inc.'s 10-day call/put volume ratio of 3.53 ranks in its 81st annual percentile, showing a healthier-than-normal appetite for long calls over puts in the past two weeks. Also, of the 18 analysts covering GILD, 15 deem it a "buy" or better, with three "holds" and zero "sells."

  • HAS is off more than 6% today after BMO cut its price target on the equity to $55 from $57 and reaffirmed its "market perform" rating, citing concerns about holiday sales. Hasbro, Inc. was last seen at $54.58, now 0.8% below its year-to-date breakeven mark. The security is no stranger to pessimism, as 9.4% of its float is sold short, and would take over eight sessions to buy back, at its average daily trading volume. Sentiment in HAS' options pits is still slanted to the bullish side, though, as its 50-day ISE/CBOE/PHLX call/put volume ratio of 1.73 ranks in the 66th percentile of its annual range.

  • BMO also cut the price target of HAS rival MAT by $2 to $28, and similarly restated a "market perform" opinion. The security subsequently has dropped 5.6% to its current price of $29.44. The move to the downside is just more of the same for Mattel, Inc., which is now off over 38% in 2014. Bearish options traders have taken notice, picking up 24.19 MAT puts for every call in the past two weeks at the ISE, CBOE, and PHLX. This ratio sits only 2 percentage points from an annual bearish extreme. What's more, short interest has increased 50% since mid-June.

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    Most Active Options: Tesla Motors Inc (TSLA), Ford Motor Company, and General Motors Company

    How option traders are betting on automakers Tesla Motors Inc, Ford Motor Company, and General Motors Company

    by 12/19/2014 11:56 AM
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    The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. Among the stocks garnering attention lately are automakers Tesla Motors Inc (NASDAQ:TSLA), Ford Motor Company (NYSE:F), and General Motors Company (NYSE:GM). Let's dig deeper and see how TSLA, F, and GM are faring on the charts, and how traders are placing their bets.

    Most Active Options Table

    A day after flirting with seven-month lows south of $200, TSLA yesterday gapped 6% higher and back atop its 10-day moving average -- a feat not accomplished since mid-November. Today, the shares are catching their breath, down 0.2% at $217.82.

    Although TSLA remains 44.6% higher in 2014, the stock has struggled of late, down 11% since the start of December. Against this backdrop, option players have been picking up TSLA puts over calls at an annual-high clip during the past two weeks, either to bet bearishly or to protect their Tesla Motors Inc shares from additional downside. The equity's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at a 52-week peak of 1.30.

    F has also been a broad-market laggard, underperforming the S&P 500 Index (SPX) by about 13 percentage points during the past three months. From a longer-term perspective, F has given up 5.2% in December, and was last seen fractionally higher at $14.92.

    Despite the security's speed bumps on the charts, traders have bought to open more than five Ford Motor Company calls for every put during the past 50 days on the ISE, CBOE, and PHLX. This ratio stands higher than two-thirds of all other readings from the past year, hinting at a healthier-than-usual appetite for bullish bets over bearish. Should F continue to struggle, or should the company report disappointing December sales in a couple of weeks, an unwinding of optimism in the options pits could exacerbate selling pressure on the automaker.

    GM has fared the worst this year, surrendering 20.5% amid the ongoing recall saga. Stifling the stock's rebound attempts has been its 10-month moving average, which hasn't been conquered on a monthly closing basis since January.

    As with fellow Detroit darling Ford, General Motors Company's proverbial dance card remains full. The equity's 50-day ISE/CBOE/PHLX call/put volume ratio of 2.90 is just 2 percentage points from an annual optimistic peak. Plus, more than half the analysts following the shares maintain "buy" or better opinions. A reversal in sentiment among options traders and/or a round of downgrades could weigh further on GM, which was last seen at $32.60.


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    American Apparel Inc (APP) Ripe for a Short-Covering Rally Amid Buyout Buzz

    American Apparel Inc has been a favorite among short sellers

    by 12/19/2014 11:27 AM
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    American Apparel Inc (NSYEMKT:APP) has rallied 10% today to $1.10, as speculation swirls the retailer could be a potential takeover target. The reports cap a dramatic week for the company, which saw the ousting of controversial CEO Dov Charney, who was quickly replaced by APP's first female chief executive, Paula Schneider.

    Weekly Chart of APP Since August 2013 With 80-Week Moving Average

    Heading into today's session, APP was staring at a nearly 19% year-to-date deficit. However, thanks to this week's raft of well-received developments, the equity is on pace to close north of its 80-week moving average for the first time since early September 2013.

    Should American Apparel Inc (NSYEMKT:APP) extend its bounce, it could get a helping hand from short sellers or analysts. Although short interest declined 5.2% in the latest reporting period, it still accounts for 11.2% of the equity's available float, representing almost 12 sessions' worth of pent-up buying demand. Additionally, only one brokerage firm currently covers APP, although they maintain a "strong buy" rating. Simply stated, a continued rush to cover by shorts and/or a round of bullish brokerage initiations could translate into a fresh wave of buying power for the shares.


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    15 More Things That Will Take a 'Considerable Time'

    We're confident interest rates will go up before any of these things happen

    by 12/19/2014 9:58 AM
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    On Wednesday, after much speculation, the Federal Open Market Committee (FOMC) said it will exercise "patience" before raising interest rates for the first time since 2008, though the central bank said the new language is consistent with the infamous "considerable time" phrase that's been tossed around since September 2012. In other words, no one knows when interest rates will go up -- including the Fed -- though most still expect a hike around mid-2015.

    Regardless, there are some things in this world that we know for sure won't happen for a "considerable time." To name a few:

    1. The Cleveland Browns win a Super Bowl.

    2. The J C Penney Company Inc (NYSE:JCP) turnaround is completed.

    3. The NYSE closes on Black Friday and Christmas Eve, because why not?

    4. Tesla Motors Inc (NASDAQ:TSLA) and SpaceX CEO Elon Musk gives up his dream of colonizing Mars.

    5. Self-tying shoes -- imagine the time you'll save!

    6. Pete Rose inducted into the Major League Baseball Hall of Fame.

    7. TLC's programming slate sweeps the Emmy awards.

    8. Amazon.com, Inc. (NASDAQ:AMZN) successfully uses drones to deliver packages.

    9. AMZN actually has a profitable business model.

    10. Justin Bieber grows up.

    11. Justin Bieber produces a good song.

    12. Bill Ackman and Carl Icahn sing karaoke duet of "Islands in the Stream."

    13. The United States government functions competently, shows bipartisanship.

    14. Gum holds flavor for more than five minutes.

    15. "The Interview 2" is released.

    The JCP turnaround will take considerable time

    Be sure to check back, as we may add to this list in considerable time.


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