Random Friday: VXX Hasn't Changed, But Fantasy Sports Have

Checking in on the iPath S&P 500 VIX Short-Term Futures ETN (VXX), daily fantasy sports bots, and more

Jul 17, 2015 at 9:44 AM
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It's Friday, it's a bull market again, and … as far as I know, there's no Most Important Greek Deadline Ever this weekend. I could be totally wrong on that last one, but we're probably ignoring Greece for now anyway. So, Back to the Randoms! 

I used to write up the iPath S&P 500 VIX Short-Term Futures ETN (VXX) a bit more than I do; in fact, I can't remember the last time I wrote it up. I'm pretty sure most are well-versed in the futility of owning VXX for any length of time. It goes down because of the near-permanent contango in CBOE Volatility Index (VIX) futures, but it's not the actual rolling of VIX futures to maintain duration that costs VXX money. Rather, it's the implied cost of owning a declining asset (i.e. a VIX future at a premium) for even a microscopic amount of time. 

Long story short, if I bought a VIX future when I started writing this sentence, it was worth less when I finished this sentence. VXX proxies that dynamic.

Anyway, Statistical Ideas set out to look at some numbers on holding VXX, and as one would expect, it's not pretty:

"In the past ~3.5 years (890 days), there have been 163 250-day lows (~weekly), but only 0 250-day highs.  One year of course is ~250 trading days, and so there has ​​never been such a duration when one could have profitably bought and held this product​ (not even if we stretched back the VXX data for a 2 remaining two additional years.)​  Even if we instead convert to semi-annual periods, there still has been zero 125-day highs (so 0% of the 890 days).  This avows how rapidly the product collapses, that no eventual spike has ever became a 6-month high." 

Last time I updated my VXX data, it had made a new all-time low on about 21% of all trading days, basically once per week. So it's none too surprising that you literally never win by holding for any length of time. 

But what if there's another "Lehman"? Perhaps one that's much worse? This, from Bloomberg:

"Hedge fund manager Paul Singer said that China's debt-fueled stock market crash may have larger implications than the U.S. subprime mortgage crisis, echoing warnings from fellow billionaire money managers Bill Ackman and Jeffrey Gundlach. 

'This is way bigger than subprime,' Singer, founder of hedge fund Elliott Management, said at the CNBC Institutional Investor Delivering Alpha Conference in New York in response to a question about China's crash potentially affecting other markets." 

Forget what I said earlier. Buy VXX! And duct tape! Sounds like we're in for a global financial market conflagration.

"Singer said it may not be big enough to cause a global financial market conflagration." 

Phew, never mind. Cancel that VXX order. 

Maybe I should put all my time and money into Daily Fantasy Sports (DFS)? Or not.

ESPN's David Purdum recounts a story of a high-volume DFS player adjusting at warped speed to late-breaking NBA news and cleaning up in a $400,000 tournament. How did he do it?

"It would have taken a firestorm of keystrokes and clicks to manually adjust 400 lineups in an hour, but a computer script could do that work in no time. Will that kind of computer automation make high-volume traders even more powerful? The vast majority of players don't support that vision, while the biggest game operators, for obvious reasons, are attracted to the larger contests that high-volume players create. Last week, both DraftKings and FanDuel, the two competing industry giants, made decisions benefiting high-volume players. 

It's created a divide and brought us to a pivotal point in the meteoric rise of daily fantasy sports, the micro-version of the traditional season-long rotisserie game that is a suddenly a billion dollar industry. At a time when more eyes are on DFS than ever, are computers taking over the game?" 

Yes, those algos we know and love in equity and options and futures trading have now joined the DFS space in a big way. If it sounds exactly like the path of online poker, well, that's because it's exactly like the path of online poker. Except it's worse in that the house "rake" in DFS is larger, so you're already facing an uphill battle.

There's debate as to whether the scripts actually benefit the users. There are good arguments on both sides.

Let's assume for a second that everyone can access a basic player valuation model. How can it not be beneficial to act quicker and more "optimally" to news? On the other hand, is it necessarily beneficial to create tens and hundreds of lineups? By definition there's a hierarchy to the quality of lineups. 

I think the answer is that, like poker, there are good "bots" and weaker ones. The weaker ones won't have any advantage, but the stronger ones will ultimately outlast all mere humans. 

Yahoo! Inc. (NASDAQ:YHOO) entered the space recently and they have capped the number of entries allowed in certain games, which curtails the advantages of the machines somewhat. Perhaps someone will ultimately outright ban scripts (or at least attempt to; it's not so simple) and just aim for a niche that attracts the lion's share of lower-volume players. 

We shall see.

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



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