Massive VXX implosion is possible today

Quote from Maverick74:

Backwardation.
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lol, best answer.

spot is 36.78

aug future is 35

aug goes off trading tuesday ...the future will converge to where spot is; and september @ 27.80 is going drive hard soon to a mid 30's spot. even if spot vix runs to 30, september still will resist dropping. that will effect vxx in ways people simply do not or cannot see. good luck guys.
 
Here is a good article with links to more about the move to backwardation. But still it doesn't explain the difference today.

http://vixandmore.blogspot.com/2011/08/vix-backwardation-commentary.html

This positive roll yield means that investors who are short VXX and/or long XIV are losing almost 1% per day due to daily rebalancing (rolling) that involves selling the front month VIX futures and buying the second month contract.
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And yet the difference today was 7.81% (I didn't have the closing number in my prior post), so perhaps it has moved further into backwardation? VXZ would have been a better choice for shorting since it is not so far into backwardation, but still it underperformed $VIX significantly.
 
Quote from dwpeters:

Here is a good article with links to more about the move to backwardation. But still it doesn't explain the difference today.

http://vixandmore.blogspot.com/2011/08/vix-backwardation-commentary.html



And yet the difference today was 7.81% (I didn't have the closing number in my prior post), so perhaps it has moved further into backwardation? VXZ would have been a better choice for shorting since it is not so far into backwardation, but still it underperformed $VIX significantly.
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The VXX rolls the front 2 months every day over the course of a month. When VXX is in backwardation the owner of VXX earns the roll yield.

So the Aug VIX future is around 35. The Sept is around 28.15. So every day, VXX is selling 35's and buying 28.15 earning the roll. The roll is usually the thing that hurts the VXX because the VIX spends most of it's time in contango and the trader pays the roll yield which can be very steep if the VIX is low around 15 or so.

So what does this mean. It means if you want to be long the VXX right now, you can get paid to hold the long ETF. This won't last long. On average it usually only lasts a few days.
 
The question is when will it go back to contango and we can all go back to watching it drift down into oblivion.

My guess is this time it could take a week or two.
 
Quote from Maverick74:

This won't last long. On average it usually only lasts a few days.
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Mav, I can't imagine the average being only a few days unless the '08 backwardation is excluded from your sample :) Just kidding.

Ironically, the curve started flattening as soon as VXX was introduced back in early '09.
 
Quote from rallymode:

Mav, I can't imagine the average being only a few days unless the '08 backwardation is excluded from your sample :) Just kidding.

Ironically, the curve started flattening as soon as VXX was introduced back in early '09.
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Bill Luby has done some great research on this:

"Of the 59 instances of backwardation in the front and second month portion of the VIX futures term structure going back to the inception of VIX futures in 2004, 37% lasted only one day and 56% lasted no more than two days, fully 83% of all instances of backwardation had ended within six days and only six backwardation events in seven years have lasted more than the current eight days. Not surprisingly, three of those six periods of extended backwardation were from 2008, two were from 2009 and the last one was from 2007."

http://vixandmore.blogspot.com/2011/08/vix-backwardation-commentary.html
 
Thought Usual VIX implosion will fizzle in a couple of days and bought puts on VXX. (ETN). Cut loss and got out.
Due to backwardation in VIX futures VXX is stobbornly positive though cash vix is down.
XIV (ETN) has collapsed from 16 to 9 since 1st Aug.
May be this time it might take more than a week may be.
 

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