Just about every source has written about how, the VXX is what we thought it was: ?a good way to day trade volatility and a terrible vehicle for tracking the VIX. ?We have written ?about it?multiple times. ?Bill at?VIXandMore?has, Jared at?Condor Options?has, actually just about everyone has. ?However, very rarely do we get such a clear example of how the ETN fails as a multi-day VIX tracker than we saw over the last two days. ?Take a look at this chart:
The top graph is VXX. ?Notice that it closed lower than where the ETN opened on Tuesday morning. ?The bottom chart is VIX, notice that it is clearly higher than the where it opened on Tuesday. ?This is because of whats often mistakenly called ‘roll yield’ and I like to call the sisyphus effect in VIX ETP’s. ?Overtime, that small difference will amount to a lot of dollars. ?Since inception VXX is now down over 99%! Now part of that is because of bad timing of the listing, but a large portion is related to the Sisyphus effect in the ETN.
The Trade:
If one thinks the VIX is going to pop in the next hour or two, by all means, buy VXX. ?If one thinks the VIX is going to pop in the next year or two, ?find a different way to hedge.
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