VIX vs VXX historical graph

I am immediately starting to get feedback from readers with the results of the analysis of the historical VXX data available here. What was obviously missing was a relation between the VIX (blue, right axis) and the VXX (purple, left axis), we can now clearly see it thanks to a fellow investor friend mine:

Look at the graph:

2004/5/6 – the vix is moving in a 10-20 range and contango is killing the vxx

2007 – volatility is picking up from 10 to 30, contango is keeping the vxx flat

2008 – the highest vix spike ever (80) quadruples the vxx, but contango erases all of the impact in less than two years

Conclusion:

If you have time on your side, you can handle any vxx spike, the trick is to never let a vxx short position become more than 5-10% of your portfolio (5% when you first short and 10% when the market bottoms) so that you can handle an increase by a factor of 10 without margin calls

If you have more interesting observations like this please let me know.

Cheers!
jrv

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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12 Responses to VIX vs VXX historical graph

  1. Pingback: VIX contango – backwardation historical graph | The Intelligent Investor Blog

  2. trading.nie says:

    Hi jrv, I have been studying and trading VXX for several months – so super nice to stumble upon your fascinating blog. I will need to understand all your findings in detail so expect more questions (and perhaps some ideas) coming from me. To start regarding the graph above what explains the high VXX readings in 2004 while there is no corresponding VIX spike?

    Groeten uit Nederland! Max

  3. jrv says:

    The VXX started to be calculated from the moment when there were VIX futures available in 2004 and in the period the futures were in a persistent and long period of contango up to 2007, that basically killed the VXX, and also the VIX was at very low levels and even going lower, that’s why the VXX started going down fast during all that period. It’s not a high reading, its just the staring point of the VXX and from then on it went abruptly down and had some recoveries for the 2008/2009 crisis and in 2007 but it never recovered to the original levels, and I have my serious doubts it will ever because most of the time the VIX futures are in contango and that erodes the VXX value.

    The long term historical trend of the VXX is down but it can have violent spikes that multiply its value so its not as easy to trade it as it initially would seem.

    Ik spreek Nederlaands, wat een kleine wereld he!
    Mijn vrouw is Vlaams, ik heb tien jaren in Belgie gewoond.

    Groetjes uit Bazilie een twijfel niet zoveel vragen als je wilt maken !

  4. Ghamal de la Guardia says:

    Hi jrv,

    Can you go long the VIX and short VXX? Seems like a safer bet.

    Really enjoy your blog, thanks for sharing your interesting work!

  5. jrv says:

    Hi Ghamal,

    It all depends how you plan to go long on the vix, there are several alternatives, you can do it with futures, options or indirecty via ETFs. It does look interesting as a strategy, I tried to see if it was possible to go long on the VIX by shorting the XIV but its not possible to short, that would have been ideal to capture the underperformace of the XIV.

    I also evaluated hedging a VXX short by going long on the VIX by buying call options or futures but it is not clearly a good protection against the strong backwardation suffered by the VXX during these times, so it could not necessarily cover your VXX short losses. It would definitely help hedging big part of the losses, but also cost you money and therefore limit your gains, and if the bad times last enough you would have to buy more VIX or call futures to keep on protecting your VXX short. So any specific strategy should be very thoroughly evaluated before doing it to minimize the probability of suffering losses.

    Cheers!
    jrv

  6. trading.nie says:

    Nee het is geen kleine wereld maar een klein landje :-)

    Today VIX down 2.5% at 41.8 while VXX up 2.6% at 43.7 – it seems VXX now has the strong tailwind upwards. I’d be interested in your opinion on the chances of VXX ending under 40 by Sep 16?

    Groetjes uit Den Haag – en neem een caparinha voor me!

  7. jrv says:

    Using the VXX pricing model for the VXX to trade under 40 by that date you would have to have the 1st and 2nd futures gradually falling from current values of 36.35 and 32.55 to a first future value of 31 or less and a second future value at 32 or less.

    I think that is quite possible more likely than not actually but that’s of course supposing that fear and volatility slowly goes away in a month, but if it doesn’t it could perfectly be over 40. Since it could perfectly be that instead of falling you have the futures and VIX going up even more due to whatever bad news before, that would still make the VXX go higher and therefore reduce a lot the probability of having a VXX under 40 by then.

    There are other futures combinations that would produce lower values than 40 for the VXX.

    If you ask me to make a bet I would say yes but not with a high probability.

  8. trading.nie says:

    Monthly VXX bear put spreads have been an effective limited risk approach for most of the history but I am still backtesting with ivolatility.com data up to last expiration and that’s looking less pretty. Simultaneously selling far otm VXX puts to fund far otm VXX calls should hedge these vicious VXX spikes but I haven’t backtested it yet.

  9. jrv says:

    interesting, as long as you feel comfortable managing your risks (magin calls etc..) and are not too off with the macro scenario and if it back tests well i think there can money be made in these extreme times

  10. Fisher says:

    Great chart!

  11. Julio says:

    jrv, send me your E-Mail I have information about the Vix

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