The Short VIX Play is Floundering at the Moment

The short VIX play (ex. long XIV or short VXX) has been floundering for nearly 3 months, which is important given (smart) directional traders’ tendency to spend most days short the VIX (and rightly so). XIV returns since 07/03/2014:

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Yesterday was particularly bad with XIV down -7.5%. For a little perspective, losses of this magnitude have occurred about 8 times per year since 2004, so while yesterday’s loss shouldn’t be unexpected, it was significant (read more).

We have now gone 58 trading days without a new low in VXX (or high in XIV). As the table below shows (updated from this post) that’s the 8th longest run since 2004.

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VXX is still 12% above its low of 27.17, so we’ll likely see this streak continue a bit longer.

A bright spot for the short-term is that we’re approaching overbought levels on the VIX where we have historically seen the impact of mean-reversion take over, which would put downward pressure on the index. To illustrate, the table below (updated from this post) shows VXX returns after the VIX index reaches 20% above its 10-day average (we’re currently 16.3% above the average).

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On a separate (but not very statistically robust) note, our current weakness is conforming with the results of this study showing how the market tends to be weak following a big loss from a new high like we experienced back in early July.

None of this is meant to be a call on the future of the VIX play (that’s reserved for subscribers). This is just meant to tie together some of our previous studies that speak to where we are today:

Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle.

Good Trading,
Volatility Made Simple


Wonk note: Data prior to the launch of XIV and VXX has been simulated. We’re able to do this accurately using a combination of the indices and the futures data on which these ETPs are based. Read more about simulating data for VIX ETPs.

Posted in Real-Time Analysis.