We received numerous emails regarding shorting Puts in VXX. Our research staff ran a study which we discussed in the Market Measures segment on May 3rd, 2016, “Getting Long Volatility By Selling Puts in VXX?”. It was frustrating to note that even though our win rate was high, the strategy was a loser, even in low Implied Volatility (IV) markets when the Probability of Profit (POP) was high. This segment takes a deeper look into VXX and examines its historical performance. Can we profit in some way from this underlying?
VXX is based on the /VX, the VIX Futures. The VIX futures are normally in Contango. This generally results in VXX moving lower over time because of the rolling process. The VIX can remain stable and VXX still moves lower. This is also referred to as Drag. How does this impact the performance of VXX? VXX has a tendency to move lower over time due to its rolling mechanism in VIX futures. This means, even when VIX is sitting at the same level, VXX could keep going lower. But by how much does this impact the actual performance of VXX? Our study was conducted in the VXX covering a time period from 2009 to the present. We compared the average performance time frames of 1, 7, 30 and 45 calendar days.
A table of the study results was displayed. The table included the duration, average P/L, median P/L, win ratio, biggest profit and biggest loss. The table showed that although the biggest profit dwarfed the biggest loss ten fold, being long the VXX had a low win rate in all time frames with the longer time periods having the worst median P/L and win ratios. VXX yielded positive returns on average but most occurrences are concentrated in the negative territory. This is part of the reason why the strategy of selling puts was not profitable. Low IV periods didn’t improve things, it made being long VXX even worse. One table displayed the win rates for the different time periods and the other the average P/L. The POP was unpredictable and the P/L was negative.
For more on information on Volatility Drag see:
Market Measures from November 5th, 2014: “Drag”
Market Measures from January 15th, 2015: "/VX Calendars & VXX Trading”
Options Jive from December 16th, 2015: “Different Types of Drag”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the important takeaways, Tom and Tony’s insightful comments and a better understanding of why it's so hard to be long VXX even in low IV environments.
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