This Week in VIX Options and ETNs – 8/31/2013

For all the criticism that gets thrown at the iShares S&P 500 VIX Short Term Futures ETN (VXX – 17.04) it does do what it is supposed to do when it is supposed to do it.  That means when the S&P 500 sells off in a manner than results in a spike in VIX and front month VIX futures VXX performs as expected.  That is just what happened this week as VXX rose just over 15% based on a drop of almost 2% in the S&P 500.  In a flat or up trending stock market environment VXX faces a headwind that dampens performance.  I often like to tell traders that buying VXX should be done with the same mentality that one has when buying an option contract with time value.  However, when you buy an option contract and the market does what you expect the result is usually a pretty nice payoff.  Anyone buying VXX when it was in the 14’s recently received an option like payoff.

VXX was introduced in January 2009 and there have been twenty one weeks since then where VXX rose more than 10%.  Being a long weekend I’ve got extra time on my hands so I played with the numbers.  Of those 21 times that VXX rose over 10% in a week VXX was lower on the following week 14 times or right at 66.7%.   I did some more digging and nine of these 10%+ weeks for VXX occurred over  twenty one week period in 2011 (June to October).  In fact from early June 2011 to around Thanksgiving VXX more than doubled.   If you are of the opinion that more volatility is on the horizon it is not too late to get into VXX.  Conversely, if you are of the opinion that this is a blip and a return to normalcy is coming that odds are with a short term short trade in VXX.

VXX Weekly Performance Corrected

The table above shows the 22 times (including this past week) that VXX has gained more than 10% in a week and the following week’s performance for the ETN.

VIX option trading was light if one takes into consideration the 21% move in VIX and 15% move in September VIX futures from last week.  It appears that positions are in place to benefit from a VIX spike and the move this past week did not attract many sellers.  Another indication that there were not sellers of VIX options on the move higher was the performance of VVIX which rose to 92.60 for the week.

Options ETNs