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iPath S&P 500 VIX ST Futures ETN Message Board

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  • tj.patel tj.patel Aug 13, 2012 4:34 PM Flag

    I,m Long this P.O.S Question Tho

    Guys, VXX is not a stock, it's basically a daily stastical calculation. The rules of Technical analysis does not apply and it's long term expected value is $0 (thus the seemingly permanent downslope). That said, it's actually performing exactly like it's suppose to, it's used to hedge against sharp declines in long position of actual stocks of companies in a portfolio. It's based on Volatility Futures which are in steep contango (i.e. more downside for VXX in coming weeks)

    To give you an idea how complex this is, 1) you have stocks 2) you have an index of stocks like s&p 500 3) you have options on this index 4) based on the options there's implied volatility calcuations 5) then you have futures on volatility 6) then you finally have VXX which is based on these volatility futures.

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    • Okay smarty pants. All i read is how big institutions fleeing stocks. So why then wouldnt the vxx see that and go up? When people are fleeing stocks as seen in the low volumes in trades doesnt that constitute fear? People leave stock positions becase they are fearful they go lower

      • 1 Reply to knowmaas
      • Low volume doesn't necessairly mean lower price (it just means less transactions). You can have a market rally with historically low volume (as we experienced early this year). That stuff aside, VXX isn't impacted by market volume. It's calculation is a function of VIX 1st and 2nd month futures (note this is VIX) Without going into too much detail, outter month futures generaly trade at higher prices than near term futures because there's more uncertainty over a longer time period (this relationship is called contango). So today, 1st month future (which expires Aug 22nd) closed at $15.80 and 2nd month (expires Sept 19th) closed at $18.22 (you can get this from VXX tries to achieve a constant 30 day exposure. So, assuming 20 trading days in a month, the VXX today would be comprised of 30% (6 days left / 20) of Aug VIX Futures and 70% (14/20) of Sept VIX Futures. Tomorrow however, VXX has to change the weight so it's again 30 days out on a weighted basis. In order to do that, VXX managers sell 1/6 of the Aug contracts at price of $15.80 and use the proceeds to by Sept Contract at a HIGHER price of $18.22. THIS DAILY ROLL MEANS THEY'RE CONSTANTLY SELLING LOW AND BUYING HIGH, EVERYDAY. Again due to contango. However there are instances when the outer month is cheaper than near month (called backwardation). It happend last summer Aug-Sept, look how VXX performed then (up by 200%). During this backwardation period, markets were more nervious about what was going to happen to their holdings in the next 30 days instead of outer months and bought a lot of protection to hedge the downside in the short term. VXX was essentially selling high and buy low every day.

        Hope this helps, I have a model that tracks backwardation and contango levels. Without understanding the math, it's difficult to time it and technical rules don't apply to VXX, TVIX, UVXY, etc.

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