Answering the VXST vs. VXX Question

The growing popularity of weekly options, coupled with the unique properties of the VIX franchise has led to large growth and overall volumes in the trading of VXX weekly options.  Now that CBOE has launched VXST options, options on “weekly VIX”, investors have another choice.  So how should one go about deciding between the two assets?

The first important factor to consider is that VXX and VXST have very different underlyings, and will trade and react to the market much differently.

The underlying for VXX is a combination of front and second month VIX futures, the make-up of which varies depending on the date.  This blending of maturities generally dampens the volatility of VXX relative to front month VIX as an example.  The rationale for this is that when volatility increases, it tends to be a reaction to a market event or uncertainty, which generally tends to be a shorter duration risk or uncertainty.  The more time that passes, the more time the market has to “digest the news” and to return to more “normal” volatility levels.  In essence, when you trade a weekly option on the VXX, you are trading a weekly option on what the market is going to do over the next month, so a short term (two day) trend may not impact the VXX heavily.

The underlying for VXST is the “weekly” VIX future.  Because you are looking at an extremely short term product, small changes in the underlying market are more likely to have a significant impact on volatility levels.  Unlike the underlying for VXX, if the market has a short term sell off, or a short term rally, it is much more likely to impact the pricing of the short term options on SPX, which in turn will make the VXST futures and options move.  Another, simpler way to say this is that because short term options are “dollar cheap” and have lower vega per option, smaller dollar moves in the options will produce greater impact on the volatility levels.

So what does all of this mean to an investor trying to decide which product to trade?  In general it means that they are very different products with different characteristics.  One simple example is that VXST options will trade at a much higher “volatility” than the VXX weekly options.  For the investor, this means that if you are selling options, you will collect more money for each option you sell.  If you are buying options, you will have to pay more for the option, but you will also have a greater likelihood that the underlying will move.  VXST will be a better “gauge for the short term market”, so if an investor thinks that the SPX is going to rally over the next two days, and wants to sell volatility deltas to help monetize that view, using VXST will be the better play, because those options will be more sensitive to the short term SPX moves.

There is no perfect strategy, and each investor needs to carefully weigh their investment decisions.  All of that being said, it is very clear that if you want a short term volatility option that is going to react to your short term view of the S&P 500, VXST is a much more accurate barometer than the VXX, because the underlying simply represents more accurately a “short term view of the market”.