Getting Back In The Contango Trade

Bought puts on VXX.

music selection: “Girl On Fire” — Alicia Keys

weigh-in:  211.0 +1.0

I’m getting back to my roots. VXX suffers from terminal “contango”. That is, it is an ETF designed with intent to track the DAILY price moves in the ^VIX volatility index. It is horribly constructed for a long term instrument however.  It uses front and second month futures and rolls them daily. In a normal environment, because the longer dated future will have more time value, it will be more expensive than the shorter dated future. Thus, the fund sells a cheap asset to buy a more expensive one almost every day. This is resulted in an ETF that loses on average 60% a year.

Certainly, it times of high volatility, the futures can go into “backwardation” with the front month future being more expensive. This happened with COVID-19, causing the price of VXX to skyrocket. Now that we have an uptrend back in the broad market, I’m betting the long term decay of VXX will resume.

Today I bought 12 contracts of VXX210115P00035000 for 10.49 a share. That puts 12,590 of capital at risk (about 10% of my main trading account). I’m targeting a 15-20% gain for exit and think that could happen as soon as 30 days. I’ll be rolling down each time I cash out for compounding.

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