Active-Trader - Short the VIX

Welcome back Active Traders and Wealth Builders.

One of the great things about investing in the stock market is that it has a positive historical bias.  That means that you can simply buy a broad stock market index and if you hold onto it long enough you are bound to make money.  Throw in dividends and the picture gets even better. It makes me wonder why anyone would bother with any other asset class given how liquid stocks are.

What if we found something to trade that did the exact opposite over time, that is go down or lose value?  Would we be able to take advantage of that persistent trend?  Of course we would.

And such a symbol does exist in the form of VXX - The SP500 VIX Short Term Futures ETF.  There are a number of VIX ETF products, and virtually all of them go down over the long term, but VXX takes the cake as follows.

VXX debuted back in January 30, 2009 at a split adjusted price of $6,918 per share.  Since then the VXX has fallen to a closing value on Friday of $27.89.   On an annualized basis, that is a loss of -66% per year! Over time the long term performance of the stock market is approximately +7% per year.  That means that a short position in VXX would out-perform stocks on a 10 to 1 ratio!   In fact, they need to reverse split the VXX (where you have fewer shares but at a higher price) just to keep the price above zero.

My first idea is to simply short VXX.  Unfortunately, that's not allowed since VXX is not on the "Easy to Borrow" list.  The ability to short VXX is reserved for the issuer, someone much higher up the financial food chain then myself.  The good news is that you can trade options on VXX and the other VXX products.  As for bearish trades, you can either buy puts or sell calls.   Selling calls is preferable since with those positions, we can be on the winning side of theta decay.

VXX seems to do basically the opposite of stock prices.  When stocks rally VXX drops.  When stocks sell off, VXX rallies hard and fast.  This past week was a good case in point and the low of the week in VXX was 27.02.  On Thursday when the market was ugly and the Dow 30 was down about 150 points, VXX rallied hard up to about 30.  I saw this as an opportunity and sold the weekly 30/31 Call Credit Spread on Thursday afternoon for a credit of 0.25. Typically when I sell spreads, I want to take a credit of at least 30% of the width of the spread and this one was only 25%.  But with VXX at a short term high and one day until expiration, I took the trade.

After hours, GOOGL reported good profits and the stock market sell-off came to an end.  The next morning VXX opened at about 28.8 and never looked back.  So I took a max profit on that trade without even requiring a closing transaction.

So keep an eye out for trades as follows.  When things get ugly in the stock market, wait until it gets to a point of maximum pain, when you feel you just have start unloading stocks to ease the pain of loss.  Then sell some VXX calls and wait for the VXX to come back to earth.

The other thing you can do is simply buy VXX if you expect things to get ugly. But don't overstay since the odds are against you holding VXX on the long side.

Have a great week ahead.