Food For Thought!
Part of interesting emails sent to and from us.
".......Greetings, I just have one quick question If I am understanding things correctly because the VXX holds the term structure between the months (unlike the Vix or /VX) if there is a hard fast move up, is there a way to calculate if it would be more beneficial selling the front month pop - or going out say 50-70 days and selling the pop there .. knowing that not only will vol come in on mean reversion, but also that the ETF has a long term drag it also has to over come. so that + prem received .. which is better and how would one determine this?
Would
it be something like 50 cents a month plus pop in vol? so if you get 5.00 prem
60 days out you kinda got 6.00 (NOT CREDIT But realistic distance from ATM)= Drag, and time and Vol are all decaying
additions the short term prem seller misses?
am I on
the correct Track?
Thank
you in advance
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It’s
a great question and I never thought much about IV duration as it relates to
VXX. Let me copy XXXX TRADER, he’s our IV guru. Let’s hear his take. I think your numbers
sound pretty good and your logic is solid for sure.
Enjoy
the weekend,
XXXXXXXXXXXXXXXXXXXXXXXX
Hi XXXXXXXXX
The drag in the VXX is due to the difference in the /VX futures when the
VXX has to roll its position from one /VX future to another every day. The
higher the back month /VX, the greater the drag. It also depends on when during
the VXX rolling cycle that difference occurs. If the VXX has only a few
contracts left in the front month, then a widening out of that contango, with
the back month /VX moving higher relative to the front month, the drag wouldn’t
be as pronounced.
Over the past couple of weeks, the contango in /VX has been pretty narrow
thanks to the spike up in the VIX. With 8 days on the Feb /VX and 35 on the
March, most of the VXX is in March. So, a widening of the contango between Feb
and March probably wound’t hit VXX that hard. That’s why I wouldn’t use VXX
options that are too close to expiration, like the Feb weeklys or regular Febs.
Using the March VXX for a bearish trade would take advantage of a drop in vol,
as well as a potential widening of the contango between March and April.
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