Put buyers have resurfaced in iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), but once again, they seem to be on the wrong side of the things as we first noticed put buying in this ETN late last week as VXX was trading at an all time product low. Since then, VXX has sprung to life, climbing from a $32 handle to close above $37 just yesterday
VXX put buyers have been directionally incorrect. VXX has risen rather sharply in the past few sessions, climbing from an all time product low of $32.48 just four trading sessions ago to close on Tuesday at $37.26.
The VIX (CBOE Volatility Index) itself has risen more than 25% in during this short time period of the past four sessions, and VXX is up only about 15% during this time frame. Thus, it is important once again to reiterate that VXX does not directly track VIX itself, but instead VXX is based on the S&P 500 VIX Short Term Futures Index.
This index is constructed using a daily rolling long position composed of the first and second month VIX futures contracts. According to www.etfdb.com, the roll schedule of these futures contracts is as follows: the futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.
Thus, put buyers in VXX may be acting on a hunch that they believe the recent spike in the VIX is overdone, but it is important for ETF investors to distinguish between VXX and VIX, and understand that returns of the two instruments are rarely in lockstep do the fact that VXX is essence a derivative of a derivative, and the VIX futures curve itself is often in contango, which negatively impacts the performance of VXX itself over time due to “roll costs.” For those looking for “short” exposure to derivatives linked to the VIX and are not looking to use options to express such sentiments via trades, a number of “inverse” products exist in this space.