Schaeffer's Trading Floor Blog

Fly Me to the VXX Moon

The VXX fails to make a lower low on Friday

by 1/28/2013 7:53 AM
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Well, it had to happen someday. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) failed to make a lower low on Friday. It was the first time it managed that feat in 2013.

Bigotry of low expectations comes to mind.

It didn't miss incremental new lows by much. It had to tick below 22.45 and it got as low as 22.58, before rallying to close up on the day at 22.95.

It's gotten hammered this year, primarily thanks to the CBOE Market Volatility Index (VIX) losing nearly half its value since the peaks of the Fiscal Cliff Fear Fest. But at a full of 12, VIX just isn't going much lower any time soon. Yes, it's still overpriced vs. the realized volatility (RV) of the S&P 500 Index (SPX). In fact, it's wildly overpriced by that metric, as 10-day RV in SPX has dribbled down to 4.26.

No, that's not a misprint. SPX is barely moving 0.25% per day. If it stays at that pace for another month or two, VIX may trickle down again. But until then, it will likely pre-anticipate the next resumption of Fear.

The VXX is also getting hit a bit by VIX futures contango, though that's not a huge driver right now. February VIX sits near 14 and March VIX near 15, so at $1, it's not a gigantic killjoy.

I wouldn't ever buy-and-hold VXX for any length of time more than a couple of days, but I would give it my coveted "Less Horrendous to Get In Now" than usual. Remember that "usual" case is that VXX is drifting straight towards 0.

The iPath S&P 500 VIX Mid-Term Futures (VXZ) is also fine here. It proxies rolling four-to-seven month VIX futures. July VIX currently sits at 18, which sounds like a large premium. And I wouldn't actually buy July; that premium is going to erode over time. But remember, the VXZ maintains constant duration, and five points or so of premium with VIX in the low teens and tweens isn't half bad.

Whatever you do though, stay away from leveraged volatility exchange-traded notes (ETNs) like the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) and the ProShares Trust Ultra VIX Short-Term Futures ETF (UVXY). The VXX itself is challenging enough to ever go long; with leveraged trackers, you not only have to get them right directionally, you have to time them almost perfectly.

I should note that I'm personally not buying VXX. I'm just saying if you're of a mind to do it, it is really as decent a time as any to take a shot. Just keep short time horizons -- I can't emphasize that enough.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.

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