VXX Trading Plan

This is the VXX trading plan that I implement in some of larger accounts.

• What is VXX?
  It's a long volatility ETN that appears to constantly decline.

Here is the VXX monthly chart

The chart makes it pretty clear that if you had been short you would have made more money than any crpto has made during that period.

• Volatility
  • Statistical measure of market movement over a period of time.
  • Historical = actual; Implied = market's best guess of future volatility.
  • VXX tracks 30 day implied via the /VX volatility futures.
  • Near term volatility is less than longer term ~80% of the time a.k.a. contango.
  • Strong "reversion to the mean" characteristics.
  • Statistical base means strong floor (~12) and reasonably strong ceiling (~60) with average ~17.
  • Velocity to upside is extreme (25-50% in a day or two, 100% possible).

• VXX's Decline

  • Constant 30day volatility exposure = variable weighting of front and next month contracts, each passing day requires more back month contracts.
  • Back month generally > front month, result is buying high, selling low (average sell price < average buy price).
  • 180 day vol averages ~22.5 whereas 30d vol averages ~17.0. ~5 loss (20%) over 180d expected.
  • Plus geometric return bias (VXX matches vol's 30d % change any given day; takes +1.01% return to recoup -1.0% loss; VXX down more days than up; VXX volatility is high ~60% or more which exacerbates issue).

• VXX Trading

  • Goal is to capture decline without bankrupting account in a volatility spike.
  • Short stock = Hard to Borrow+Fees; Short Calls = fixed credit, unlimited risk; Call verticals = skew pricing+fixed risk:reward; put vertical = skew pricing+fixed risk:reward; etc.
  • At The Money put purchases = best method of capture.

• Advantages

  • Defined risk (max loss = debit)
  • Unlimited profit potential
  • Negative delta = bet on decline
  • Positive returns since inception

• Disadvantages

  • Buying maximum time/IV/extrinsic value
  • Upside skew; higher strikes = higher extrinsic
  • Regular splits (reduced flexibility)
  • Wide bid/ask at 180DTE