Betting on Volatility at Doorbuster Prices

The sale on iPath S&P 500 VIX Short-Term Futures ETN (VXX) started early this year

by Adam Warner

Published on Dec 1, 2014 at 9:21 AM
Updated on Apr 20, 2015 at 5:10 PM

Black Friday sales get earlier and earlier every year. It seemed the standard was 6 p.m. Thanksgiving Day across the board this year.

I have a major problem with that. Getting big discounts should require some sort of major sacrifice, like getting up at 3 a.m. or waiting outside in frigid temps all day -- or (preferably) both.

But if you wanted to buy iPath S&P 500 VIX Short-Term Futures ETN (VXX) at doorbuster prices -- well, you didn't even have to wait until Thursday. It hit all-time lows midday Wednesday, its first touch of un-greatness since Sept. 19. That price was $26.59.

A price means nothing minus context, so here's the context. VXX ended 2013 at $42.55, so as of Friday's close, it has lost 35.6% in 2014. CBOE Volatility Index (VIX) itself closed at $13.72 at year-end, so it's down a mere $0.39 for the year (3%!) -- i.e., a rounding error.

It's a lesson we've repeated over and over, but it bears reiterating yet again. Don't ever hold VXX! VIX has had a nice range in 2014, basically 10 to 30. But at the end of the day, it has churned for 11 months. And that is utterly normal. VIX mean-reverts. It can fluctuate in the short and intermediate term, but longer-term trends tend to persist. And until further notice, VIX resides within a long-term Low VIX Regime. Perhaps we're near the end of that trend, but you're almost always better off assuming a trend will stay in place than assuming the trend will change and you'll get ahead of it.

I'd guess we have another year or so left of generally low VIX (with a few pops mixed in to shake everyone out). But, as always, who knows? I'm not going to go buy VIX futures a year from now in pre-anticipation. I'm just judging by the fact that we're (inexactly) about four years into this Low VIX era, and these sort of macro trends last about four to six years.

Maybe 2015 will be the year paying up for VIX-time finally pays off. VIX futures buyers in the here and now sure think so. Here is the term structure now versus the end of 2013.

Vix Futures 2013 to 2015
Chart courtesy of VIX Central

Yes, we're even more bullish on 2015 VIX than we were on 2014 VIX!

If you can time a VIX pop in VIX futures or VXX -- that is great. I'd strongly suggest playing it in the near term, by the way. But by and large, it's "Same As It Ever Was." Lots of speculation, and a high likelihood that we see some VIX pops that peter out before you can say "This Time Is Definitely Different."

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


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