Public Enemy No. 1 for the VXX

How market churn is impacting the VIX and VXX

by Adam Warner

Published on Dec 7, 2015 at 9:47 AM
Updated on Jun 24, 2020 at 10:16 AM

Consider the trader that shut his machine down a week ago Friday and spent the week in a cave. SPDR S&P 500 ETF (SPY) was 209.56, CBOE Volatility Index (VIX) was 15.12. 

And then Our Trader returned from the Cave a week later and found… SPY at 209.62, VIX at 14.81. Presumably, very little happened. 

But alas, not so much. There was a pretty good trade in there if you timed it well. SPY closed at 210.68 on Tuesday, dropped to a close of 205.61 on Thursday after dipping as low as 204.75, and then popped to 209.62 on Friday for a round-trip to nowhere. 

As always, we churned a lot and got nowhere. Again, two strategies continue to work: 

  1. Sell volatility and go spend the week in a cave
  2. Fade every move

We're nearer the high end, so it must be time to play off the short side and/or sell call spreads. Obviously it's not that simple; this won’t last forever. But until it stops, why fight the overall trendlessness?

VIX futures didn't do all that much this week net-net, either:

151207Warner1

 

It's a very slight drop across the board. Good to see that assumptions of a lasting VIX rally six months out remain intact.

Perhaps the ugliest spot on a relative basis was our good friend iPath S&P 500 VIX Short-Term Futures ETN (VXX). It dropped from 18.80 to 18.22, which is a lot for a nothing week. Again, Churn is Public Enemy No. 1 for VXX. Market churn begetting VIX churn is the worst possible domino effect. VXX remains the worst way to play for/hedge against a market drop.

We have the Most Publicized Rate Hike Ever coming up soon. I'm pretty sure it's discounted by now, but who knows how we react when it does actually happen? My guess is that the market will do the opposite of whatever it does right into the move and somehow we'll be right around here all over again.

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


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