Implied Volatility (IV) is very low and IV Rank (IVR) is depressingly low for premium sellers. The VXX is an ETF with very good liquidity and it tracks the VIX. Does this mean that buying the VXX is a good idea? What about shorting Puts as a way of getting long Deltas? It may sound good but what’s the real story?
The VXX is based upon the VIX Futures. The VIX Futures are in a state of Contango 88% of the time. The Drag on the VXX is significant. It is so significant that the ETF has gone through multiple reverse splits. It can still be used for short term trades but for longer trades there is a built in handicap. This was demonstrated with the display of a graph.
So getting long the VXX outright doesn’t work but what about selling Puts? The Market Measures segment from May 3, 2016, "Getting Long Volatility by Selling Puts in VXX" demonstrated how that doesn’t work either. A table comparing selling VXX puts in extreme low volatility and medium plus volatility was displayed. The table included the number of occurrences, average P/L and Probability of Profit (POP). The table revealed that even with an 83% POP the average P/L was negative due to the average loss being much greater than the average gain. A second table compared the average P/L and POP when managing winners at 25% of max credit received. Incredibly managing winners did not improve the average profitability. Tom noted that “we all know that Volatility is going to go higher, it’s just really expensive to guess when.”
For more information on VXX see:
Market Measures from May 20, 2016: "VXX - A Difficult Product to Get Long"
Market Measures from May 26, 2016: "Systematically Long VXX"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and a convincing explanation why buying the VXX or selling Puts in the VXX is not a winning strategy.
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