tradingthe vxx for outstanding returns. what is the vxx? etn (exchange traded note) representing a...
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Trading the VXX for
Outstanding Returns
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What is the VXX?
ETN (exchange traded note) representing a standard 30-day VIX futures price.
Contract Price Days Remaining
VX Jan 15.90 14
VX Feb 16.90 43
VX Mar 18.15 72
VX Apr 19.40 104
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What is the VXX?
VXX holds proportionate amounts of the 1st and 2nd VIX futures contracts. Example:
Contract Price Days Remaining Holding
VX Jan 15.90 14 50%
VX Feb 16.90 46 50%
VX Mar 18.15 72
VX Apr 19.40 104
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Next Day
VXX must shift its holdings from the 1st into the 2nd VIX futures contracts. Example:
Contract Price Days Remaining Holding
VX Jan 15.90 13 47%
VX Feb 16.90 45 53%
VX Mar 18.15 71
VX Apr 19.40 103
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Trading System
Proprietary indicator: $VXDIF
We use a 15 day moving average of the $VXDIF
= Price of 2nd VX future - Price of nearby FX future
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Long/Short Enter Date
Enter Price
Exit Date Exit Price
Days Held
Trade Profit
Percent Cum NAV
1.00
Long VXX 1/30/09 418.32 4/13/09 401.48 73 -16.84 -4.0% 0.96
Long XIV 4/13/09 0.72 5/18/10 3.69 400 +2.97 +412.5% 4.92
Long VXX 5/18/10 116.52 5/27/10 113.32 9 -3.20 -2.7% 4.79
Long XIV 5/27/10 3.91 8/5/11 11.71 435 +7.80 +199.5% 14.34
Long VXX 8/5/11 30.31 11/23/11 48.60 110 +18.29 +60.3% 22.98
Long XIV 11/23/11 4.99 (open) 11.82 128 +6.83 +136.9% 54.45
ResultsThe result is an amazing 54.4 times your money in the 3.5 year period beginning Jan 30, 2009.
(XIV is an ETN that is a mirror image of VXX)
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Lentz Volatility Indicator (LVI) is an indicator that shows whethervolatility, as measured by actual price movements in the $SPX index, is increasing or decreasing.
The LVI
Volatility increasing Volatility decreasing
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Again beginning at Jan 30, 2009, the trades signaled by the refined approach were:
Results
Long/Short Enter Date
Enter Price Exit Date Exit Price
Days Held
Trade Profit
Percent Cum NAV
1.00
Long VXX 1/30/09 418.32 4/13/09 401.48 73 -16.84 -4.0% 0.96
Long XIV 4/13/09 0.72 5/4/10 4.49 386 +3.77 +523.6% 5.99
Long VXX 5/4/10 89.48 6/01/10 120.76 28 +31.28 +35.0% 8.08
Long XIV 7/13/10 4.67 8/5/11 11.71 388 +7.04 +150.7% 20.26
Long VXX 8/5/11 30.31 11/25/11 49.20 112 +18.89 +62.3% 32.88
Long XIV 11/25/11 4.91 (open) 11.82 126 +6.91 +140.7% 79.51
(A remarkable 79 times your money in 3.5 years)
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Actual Results
Study period ending date
OptionVue Clients (+70%)
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Roll YieldEach day the VXX fund must sell some of its holdings
in the nearby futures contract and buy more of the 2nd VIX futures contract. This is called “rolling”.
Contract Price Days Remaining Holding
VX Jan 15.90 13 47%
VX Feb 16.90 45 53%
VX Mar 18.15 71
VX Apr 19.40 103
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Roll YieldEach day the VXX fund must sell some of its holdings
in the nearby futures contract and buy more of the 2nd VIX futures contract. Called “rolling”.
Contract Price Days Remaining Holding
VX Jan 15.90 13 47%
VX Feb 16.90 45 53%
VX Mar 18.15 71
VX Apr 19.40 103
Normal term structure
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Term Structure
Contract Price Days Remaining Holding
VX Jan 41.60 13 47%
VX Feb 34.90 45 53%
VX Mar 29.35 71
VX Apr 27.44 103
Backward term structure
Example of a backward term structure.
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Roll YieldWhen a normal term structure exists, the roll yield is
negative as the fund must buy futures at a higher price (the 2nd contracts) than the ones it is selling (the nearby).
Contract Price Days Remaining Holding
VX Jan 15.90 (selling) 13 47%
VX Feb 16.90 (buying) 45 53%
VX Mar 18.15 71
VX Apr 19.40 103
Normal term structure
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Roll Yield
Contract Price Days Remaining Holding
VX Jan 41.60 (selling) 13 47%
VX Feb 34.90 (buying) 45 53%
VX Mar 29.35 71
VX Apr 27.44 103
Backward term structure
When a backward term structure exists, the roll yield is positive as the fund may sell futures at a higher price (the nearby contracts) than the ones it is buying (the 2nd month contracts).
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Effect of Roll Yield
Normal Term Structure Negative Roll Yield, depressing the VXX price
Backward Term Structure Positive Roll Yield, enhancing the VXX price
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Effect of Volatility Changes
Increasing Volatility VXX Rises
Decreasing Volatility VXX Falls
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The Two Forces Affecting VXX Price
1. Changing Volatility Levels (Immediate, impactful)
2. Roll Yield (Subtle, slow, steady)
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Warning: VXX and XIV are volatile
Proceed at your own risk!
Example, after our clients bought in at around 10.7, the XIV dipped down to 8.1 just 5 weeks later.
Still, the use of stops is not recommended.
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VXX Trading Tools Available in the
OptionVue Software
$VX30 30-Day forward price of the VX futures
$VXXFV Fair value of the VXX$XIVFV Fair value of the XIV
$VXDIF Difference between the two nearest term VX futures
$VXXDRE Daily roll effect for the VXX$XIVDRE Daily roll effect for the XIV
The Lentz Volatility Indicator
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Articles and materials available at:
Articles on VXX Trading
www.optionvue.com/vxx.html
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XIV = VelocityShares ETN from Credit Suisse
Alternative Instruments
VXX = an iPath ETN from Barclays
VIXY = ProShares ETF that moves like the VXX
SVXY = ProShares ETF that moves like the XIV