1. Shorting VXX has more risk than long XIV. Theorectically there is no limit on how high VXX can go. So you could have margin problem in the worst case.
2. Long XIV can be much more profitable than short VXX. You can only get 100% return on a short. But you can get over 100% on a long.
For my situation, I have plenty of margin room. It would take the VXX to triple from this point for me to lose sleep. And if that happened, we'd all likely be losing a lot of sleep for one reason or another.
From what I've calculated looking at historical charts, if margin room isn't an issue, it appears that shorting the VXX generally has more upside than being long SVXY or XIV, due to the way that percentage movements compound.
Let me know if you think this is naive, but I see very little risk in having shorted the VXX at 42+, as is was recently at 27. If I'm wrong about 44ish being the top, it would need to be 140+ before a margin problem would occur. With gravity working in one's favor, I am not seeing a huge LT risk here, regardless of the underlying cause of market fear.
As for the SVXY, I've read that there are additional tax implication (special forms?), which don't pertain to VXX or XIV. Has this been an issues for you or anyone here?
One other factor specific to VXX (or vol related products) - there is always the theoretical floor in the futures value since VIX can't be 0 (unlike a stock) and the futures certainly would never be that low on the second month. Therefore, put options become literally worthless once you get to a certain level. You can still win, but it takes a few months of huge contango (10+%) to drive the VXX price lower than what is predicted by assuming the average 6% contango charge each month and the change from the current index level of the second month contract to a lower value (like 15 in the past of 13 in recent months until this month.)
This "predicted" loss is already baked in by the market makers on longer-term options. It also causes some unique differences between VXX call and VXX put prices that aren't normally present for a traditional stock.
While VIX spikes come and go you still have to always consider why it spiked.
VIX spike on a perceived crisis in Europe? Usually good to short. Terror somewhere in the world? Usually good to short. Economy officially in recession? Not so much. It's also important to know the mood of the market going into the crisis. Having every central bank trying to prop stock markets up around the world always helps.
It's a trade that you can win 25-40% on three times then get wiped out in the 150% move. It also takes a few weeks to collect that 25% but the 150% down can happen quite quickly. Also the natural hedges or protections (VIX calls) get really expensive on a spike because IV of those options also goes through the roof.
Personally I think you need to consider that the VIX futures market isn't what it was in 2008. It's much more liquid and there are a lot of products which touch it that weren't there 6 years ago. Whether this would enhance a spike (causing it to follow the index more) or detract it's hard to tell. However, the movement in the futures on Wednesday and Thursday between 4:10 and 4:15 (futures close) is concerning. We saw 100-200 bps swings both days in literally the last minutes of trade.
Having said all of that - you are correct - gravity eventually always wins.
I think there is little risk shorting a VIX spike over 30 if you have enough capital for the margin. VIX always come down eventually. You might lose 100% on your short for a few days, but eventually you will make money.
Thank you for your reply. I will admit, being somewhat new to this trade, that I don't yet follow all the lingo or strategy. Give me a few weeks, as this is an interesting enough trade for me to try to catch up on.
Perhaps, confusion is even encouraged? Just a thought.
I have seen where VXX can be calculated before it was ever officially traded, even to very accurate measure. However, from what I have seen, the 1300% that the VIX experienced in 2008 would have translated to about 300% in the VXX, if it had traded at that time. Still plenty of room for doom and gloom, though less than 1/4 of the VIX hit.
I must be missing something, still, as I'm not seeing much likely downside if one initiates their short of VXX on a VIX spike, aside from borrowing costs and margin indigestion.
I know, there is no such thing as a free lunch ... or is there? Or should I shut up before the soup kitchen becomes over-run.
I would suggest on what not to do:
- Buying later months' OTM puts
put premiums don't go up as much as you may imagine based on current option premium difference
between strikes because option premium is relative to current price of underlying stock. The rate of
premium increase slows down as underlying stock price goes down.
Hence the word "would" not "had". VXX can be calculated for those periods based on VIX futures price (traded since 2004) even though VXX did not exist back then.
2008 Aug: VIX 20, VIX futures in contango.
2008 Oct and Nov: VIX hit 80.
2008 Nov: VXX became 4.25 times of 2008 Aug.
VIX futures stayed in backwardation from 2008 Sep till 2009 Apr with short period of contango in 2008 Dec.
Next time VIX printed 20.xx is 2009 Oct, took more than a year, and VXX came back down to 2008 Aug level only on 2009 Dec.
For conservative VXX short, when VIX front futures turns to contango from backwardation is known as a good time to go short VXX, but as always, they can turn back to backwardation quickly if one is unlucky. Good luck trading.
VXX day trade:
Closed 1K shares short and Shorted again.
Some gain while moving shares short to deep ITM calls short.
Closed all 20 MNST deep ITM puts long.
Closed all remaining 10 GMCR deep ITM puts long.
Closed all remaining 10 AGN deep ITM puts long.
Closed all remaining 10 RL deep ITM puts long.
Closed all remaining 10 TWTR deep ITM puts long.
Bought 40 FB next week deep ITM puts. Rolling went wrong, carrying to next week.
15 DPZ Oct calls sold assigned short shares.
20 CORN Oct puts sold expired worthless. Believe CORN will come back down giving me chance for entry.
Rolled DPZ calls sold and PNRA puts long to Nov.
UNG broke 20 today but went back up. Couldn't go long due to lack of funds. Order of entries for UNG long will be: 1) DGAZ short, 2) UGAZ long, 3) Jan/Feb 2015 OTM calls long. or 3) and then 2) to reduce capital involved.
Account big plus, recovered yesterday's loss and then some. VXX not down much, DECK drop helped. Good to close some of momentum shorts. UAL/DECK earnings coming up next week. Wish VXX spends several days between 37 and 41. Been a tough week but luckily survived. Hope next week is better.
VXX is not something you want to play with. Very hard to make any money. You have to be lucky to buy at exactly the right time. Otherwise contango will eat 1% a day even though VIX stays constant.
Vxx will never go that high. Vxx shorts vix futures which does not correlate with vix very well. Vix was in high 30s while vix futures only a little over 20. Vix spike only last a few days. Everyone knows that.
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I am confused. I recently (two days ago) began shorting VXX. I feel good about this trade from the research I've done, along with the recent spike up in the VXX, which provides a nice head start.
Please elaborate on what you are referring to when you say, "or another 2008 where it would have gone up 1300%?"
Am I incorrect, or did the VXX not even begin trading until Jan 2009? Perhaps you are confusing it with the VIX in 2008? If I am mistaken, please educate.
Shorted 500 VXX shares.
Day trading VXX here and there with small gains.
Closed 1K FB shares short.
Closed 10 FB deep ITM puts long.
Closed 10 GMCR 10 deep ITM puts long.
Closed 10 FB Oct calls sold, dying at 0.02.
Bought 10 UAL next week deep ITM puts.
Bought 30 DPZ Nov deep ITM puts.
Account big minus mostly due to VXX. VXX is plus but big market shorts are up. Tomorrow will be really challenging with making fund, weekly/monthly rolling.
Bought flight tickets and reserved hotel rooms for early Nov trip. Hope things settle by then so I can enjoy vacation.
You'll see. VXX will continue rising for a long time with only minor pullbacks and will go much higher than you expect.
That said, the market pundits will do things like they did today and let the market rise sharply, then slowly tank it again to knock the premium out of options. VXX is a hard game to play but with the risk of a major Ebola headline looming every day, it will simply not drop as it has in the past.
Unlike every other VXX spike, this time is different. It will remain elevated. It's all about Ebola. The CDC is stoking fear because it could not prevent the first and only incident of Ebola in the US to spread and threaten contagion in multiple states where schools are now even shutting down. They even let an infected nurse fly on a commercial jet after she showed symptoms.
It will take a long time for fear to go away this time unless somebody comes up with a magical cure or prevention. Any market rise will be muted because everyone knows the next Ebola headline is coming. If the virus mutates and goes airborne which is certainly possible, VXX will spike like a 9/11 event.