Trading VXX Can Be Very Profitable

| March 6, 2015 | 1 Comment

volatilityTrading VXX Can Be Very Profitable

There are good reasons why trading iPath S&P 500 VIX Short-Term Futures ETN (VXX) is extremely popular.  With an average volume of nearly 50 million shares a day, both retail and institutional traders must be active in this ETN.

As a quick refresher, VXX is a way to get long the first two months of VIX futures.  You can read more about it here.  In a nutshell, the most popular volatility index is the VIX, or fear gauge.  However, the VIX isn’t tradable on its own.  As such, the VXX is the next, best thing.

For even more information on the VXX, check out the official product page here.

After trading at elevated levels for most of the year, VXX has finally dropped back to the low levels we’re used to.  After all, we’re still in a bull market the last time I checked.

VXX is currently trading at $27.  That’s just 5% above the 52-week low and 44% from the 52-week high.

So what makes VXX worth trading?

Here’s the deal…

You’ll hear several complaints about VXX in regard to how it tracks the VIX.  Basically, the VXX isn’t a good tracking product for the VIX itself.  Moreover, due to contango (back months priced higher than front months) in VIX futures, VXX falls consistently over time – in some cases, even when the VIX goes up.

First off, these statements are true.  But, that doesn’t mean you shouldn’t trade VXX.  Instead, it’s very important to gain a good understanding of what VXX is all about.

Remember, VXX only tracks the front two months of VIX futures.  It doesn’t track the VIX itself, and it doesn’t include the entire futures curve.  By the way, trading the VIX spot is not possible at this time, outside of synthetically doing it by using VIX options.

By purchasing VXX, you’re betting on front month volatility going up.  Front month volatility tends to increase earlier and more sharply than back months. It also drops back to average levels more quickly.

As such, VXX is an excellent instrument to trade if you expect a short-term spike in volatility (maybe from some announcement or event).  It also works in reverse.  If you think volatility is high and is going to come down soon, you can short VXX (or buy puts).

Check out the chart:

trading VXX, a chart of VXX

 

As you can see, volatility stayed elevated into the first part of 2015.  However, it has come crashing down recently as the bull market in US equities continues.

Given the spikes and dips in VXX, there are plenty of opportunities to profit from trading the ETN or its options.  But, it’s vitally important to understand what you’re trading.  Mostly, you have to realize that most spikes will be short-lived.  And, the product is likely to lose value over time.

So, should you trade VXX?

If you expect a short-term volatility spike or selloff, there’s nothing better than VXX.  For a sustained, slow rise in volatility, VXX is not the right product.  The same holds true for a sideways volatility market – unless you’re holding VXX purely as a hedge.

It comes down to this… VXX can be a great tool for profiting off of volatility moves.  It’s all about using the product correctly and understanding how it works.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

Comments (1)

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  1. Russ Addeo says:

    Is it possible after a significant shock in the financial markets and the VIX shoots up significantly that the VXX could go up to 2008-2009 levels of nearly 7,000?

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