The Unbrokenness of VXX

Thu, Mar 22, 2012 | Jared Woodard

Volatility

Some investors noticed a moment near the close of trading today during which VXX briefly was negative on the day. Here are the last couple days of VXX trading, plotted in 5-minute bars.

Source: TD Ameritrade

Those same investors probably clicked over to the CFE’s website and noticed that the VIX futures closed higher on the day. More than one person claimed that this was an indication of some kind of horrible tracking error or failure on the part of the VXX product. The chart below shows the last couple days of trading in the VIX April contract, also plotted in 5-minute bars.

Source: Interactive Brokers

See the difference? Me neither. The April VIX contract gained $0.25 on Thursday, up 1.3%. VXX gained $0.22, up 1.2%. Once you factor in the presence of just a little May futures exposure in the VXX calculation, it sure looks like there was nothing to get excited about.

I know it’s in vogue to slam volatility ETPs in general as somehow broken or dangerous, but in this case there’s no evidence that VXX did anything except exactly what it was supposed to do.

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6 Comments For This Post

  1. Jeff Patterson Says:

    Thanks for the great article Jared, but how to you explain how they traded on 3/19 and 3/20? If you compare the 5 min. charts on those 2 days, they look completely different.

  2. Jared Woodard Says:

    Jeff, they look completely identical to me on those dates as well.

  3. Jeff Patterson Says:

    Jared, I created a quick web page with screen shots of those days so you could see what I’m seeing:

    http://jmjaa.blogspot.com/2012/03/brokenness-of-vxx.html

    I would love to understand what I’m missing so I could trade accordingly.

    Thanks!

  4. Jared Woodard Says:

    Hi Jeff: the underlying for VXX is not VIX. The underlying is a blend of the 1st and 2nd month VIX futures contracts. http://www.ipathetn.com/product/VXX/

  5. Geoff Says:

    Hey Jared,

    Im new to stocks, ETFs, this whole deal. Working on my researching skills as I am trying to start buying more stocks. I noticed VXX seems to be a hot buy on Fidelity, but I have next to no idea of what I am doing since I am still learning. Looking at it’s chart it seems to have never done anything but fall, what am I missing? Thanks for any help.

  6. Jared Woodard Says:

    Geoff, you should start by reading the prospectus.

1 Trackbacks For This Post

  1. Friday links: playing hot potato | Abnormal Returns Says:

    [...] $VXX is doing what it is supposed to do.  (Condor Options) [...]

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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