VXX/VXXB Trading Strategy

VXX is an Exchange Traded Note (ETN) available for trading on the US markets. It is a volatility based product that expires in January 2019, although the issuer, Barclays Bank PLC, has recently created a second Fund VXXB which is identical.

VXX can be bought and sold just like any stock, but it is not a stock and does not behave like one. Some traders think VXX tracks the VIX Index, but in fact, it is based on VIX futures which is entirely different.

You can read a really detailed explanation of the product over at Six Figure Investing.

If you look at a long-term chart of VXX you will notice that it has relentlessly moved lower over time with occasional spikes. This is because of the constant decay due to the way it is calculated and the fact that most of the time, markets are in Contango.

Watch the short video below to learn more about Contango and Backwardation.

It seems like a bit of a no-brainer trade to just short this thing, right? Well, not really. There have been some pretty massive spikes along the way, so you would definitely not want to short the product or sell naked call.

However, buying put options tends to work quite well if you can get the timing right on a nice vol spike. Using puts spreads helps to keep the cost down and I like to go quite far out in time to give the trade plenty of time to work out.

One major variable is that we don’t know when the bull trend has ended and a vol spike and subsequent rise in VXX could end up lasting a long time. During the 2008-2009 bear market, it took VXX well over a year to drop back to pre-crisis levels.

Here are a couple of trading rules I like to follow:

  1. Go far out in time, usually, that means at least 4-5 months for me. This gives the trade plenty of time to work out.
  2. Wait until the VIX Futures Curve heads back in to Contango. I may not get the absolute top of the vol spike, but I feel my odds are improved by doing this.
  3. Takes profits systematically as the trade moves in your favor.
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A great resource for checking the state of the VIX Futures Curve is http://vixcentral.com/

Disclaimer: The information above is for educational ...

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