Massive VXX implosion is possible today

Quote from keviniyengar:

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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add xiv chart
 

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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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The backwardation and flipping back to contango lasts as long as it does mostly to due with market direction.

Rally knows this.

If spot vix comes down fast enough it will go below futures, if it does not backwardation persists.

The only thing in this case is the futures are so much below spot, it will take a good 25 or less spot vix to flip the curve. Last year all futures were far higher as a group. With the current set up it will take some time. For me, i'd like to see another week of 36 vix to get this group closer to the 30 line.

Bottom line is no one knows and no model can predict because it all has to do with the market. If you rally hard for 3 days, you get contango, if we swing a lot next week backwardation steepens, etc.
 
Quote from keviniyengar:

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.
More...

Kevin, atticus made a good point, learn pricing dynamics first. It took me a good year to model properly.

Vxx will stay stubbornly higher as both sets of futures are lower than spot and will not drop until spot vix drops below them. Without knowing how these behave trading these is similar to closing your eyes and throwing darts. I'd wait til spot goes to 30 or less to short vxx.
 
Quote from keviniyengar:

Many thanks to sellindexvol66 & Maverick for explaining the price movements of VXX & XIV due to backwardation and their structure.
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If you accept their explanation as complete then yes hurah and thx
 
Quote from Maverick74:

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
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Kind of pointless to count instances without time or slope(curve) weighting them. His research suggests backwardation is a fade. I am a huge short vol guy but my work shows differently, there's much more to gain trading into the backwardation then fading it.
 
selindexvol66 hit the nail on the head. Knowing the number of times and the average duration the futures are in backwardation is instructive, I'd take it with a big grain of salt.

Who knows what could come out in the next few days. Soc Gen could drop a bomb, BAC situation could get worse, Berlusconi could, well, continue to be Berlusconi. Lots of headline risk out there to keep this in backwardation.

For those who watch and trade this more closely, when the contracts go back to contango, say on Monday aliens land and pledge to bail the planet out for next 20 millenia, how quickly would that be reflected in the VXX? Are there guys out there who will pull the trigger immediately, or is it more of a period of days as people wait to see if spot will regain it's premium over future contracts. Or is it both?
 
Quote from Maverick74:

"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."
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It is far more interesting to look at the underlying implied vol term structure, as it would allow you to go back as far as early 90s. It is also instructive to look at Nikkei term structure as S&P500 is in the same place right now.

Generically, (having done these two studies) you find that backwardation in the forward variance curve is largely driven by the two factors - realized volatility rising significantly above some historical mean and (b) change in underlying asset (SPX) over the recent period. In a stagnant market, term structure resets back to an upward sloping, but in a consistently bearish (and volatile) market it remains well inverted. Simple spot slides on the current vol surface would yield the same results - that continuing backwardation is a product of spot movement.

So, one can make a very simple assertion - playing backwardation in VIX futures (standalone or via shorting VXX) is a very bullish play. If you fee, however, that the inversion has gone too far and vol reset would be in your favor, it's fairly trivial to trade these spreads against delta.
 
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