This is a call to all the guys that bought the VXX pricing model to email me if you want a special update. I already managed to contact several of you with a new version which includes a selling model, specially for all those of you that like to short the VXX or simply that want to be alerted automatically by selling signals. It is something helpful to support your trading system.
With all the mails I have received it is hard to reach all of you so feel free to contact me if you bought the spreadsheet (let me know when so that I can check the payment on paypal) and I’ll send you the new version.
It basically includes a shorting model, parametrizable, that gives selling signals. You can fine tune the parameters to obtain more or less signals. Its parameters depend on momentum trends for the VIX futures and the contango and backwardation as well as their absolute values. In simple words: it gives sell signals if the backwardation is disappearing and losing momentum (fast and slow moving averages are used as indicators) and the VIX futures, based on a contract weighted average of the 1st and 2nd vix futures, are still increasing but are already quite high. That simple model gave correct sell signals for every “crisis” on all the years since 2008 until 2011, and, using the default parameters, no false signals.
You would have not shorted at the peak but quite close, and most importantly: after the VXX peak was reached! It’s a nice tool to “play” with, its basically all that I use for my own trading.
For those who need the data until now or want to see how the model spreadsheet looks like you can download a data only version from here. Like that you can backtrack your trading strategies. All VIX values and its two front end months, along with the related contango and backwardation are available since they started to be traded in 2004. The VXX modeled price is also available since that date as well as the VXX market price since the ETF started in 2009.
Disclosure: It is extremely risky to short the VXX, I have known of several people, including ones that bought the pricing model, that have been ruined doing it. Last year several contacted me almost whining, with their moral on the ground about to have a heart attack, many looking at their margin accounts with their nerves destroyed and emailing me every 2 days to ask where I thought the VXX will go (which I have no idea in general). Some had to cover at a huge loss or ruin. The most ironical is that they would be rich if they could have sit tight until now, if they had the temper or had hedged and/or right sized their shorting amounts that could have been possible. So please use at your own risk. I just provide the tools I use to help with your own trading, tools which, even though are technically correct, are dangerous, and therefore should not receive more attention than deserved. A trader/speculator should a) be able to predict market trends and have excellent macro economical knowledge, but also b) must understand very well how the VXX is priced and how contango should in the long run erode its value. But… also b) is not 100% sure, even though it has been like that since 2009 and also 2004 until now, it has lost 90%-99% of its value depending on the time frame you chose. But… history might not repeat itself and there have been periods where the VXX tripled in value in a few weeks, so a great crash could have DEVASTATING effects for shorts and incredibly lucrative for longs… VXX behaves more like a put than a volatility tracker. Instead of time decay, it has contango decay. If you buy a put and the underlying stock remains stable, you will lose money on the put. If you buy VXX and the VIX remains stable, you will lose money on the VXX. The short side of puts and shorting VXX is also similar. You have in both the wind at your back as time works in your favor, but it’s a risk play. The stock underlying your puts can fall. In the VXX case, the VIX could explode. But also note that if you are a long term short it does not matter if the VXX triplicates or more since in the last two years it has lost 90% of its value. So if for example you had shorted it in its inception back in end 2009, when it was around 400 or more you would absolute have laughed at last years peak to 50 and would still have made a huge profit. Also note that to make money on the long side you basically have to be able to predict the next black swan event and buy before that since if you buy some months or a year too early contango will probably make you lose your profits by the time the black swan arrives.
In other words, trading the VXX is almost mission impossible: If you are short you need to keep the amounts low and be able to hold long enough or you risk getting wiped out if a peak arrives after you shorted. If you are long you need to have a crystal ball to predict a black swan and take a position just before, when times are calm. Those who want to still try trading it are better off with a forecasting, a pricing and a sell signalling model. But having that is also like having a dangerous weapon that might awaken your criminal or I should better say, suicidal instincts. I can help with technical tools so that you understand why the VIX goes up and the VXX down or other basic (but important) stuff like that, for example to understand why contango erodes its value or why backwardation makes it increase, even under constant volatility periods. Understanding that will help avoid driving yourself crazy in the process of trading the VXX, but regarding market speculation or market trends I have no idea where they will go and no modeling tool will tell you that (even though some claim they can).
I basically spend my time playing chess: username juanbarros on the FICS, free internet chess server, for those of you who want to challenge me, I’m there several hours a day lately :). I also dedicate time to my wife and 4 boys and lots of time reading books or 10Ks to follow my companies or the prospective ones that I like (to be ready to buy if the opportunity arises). I mention that last personal note to illustrate that trading the VXX is a very small part of my life. So if you get ruined and plan to shoot yourself, please think about it, money is not worth dying for, there are more important things, and many (probably most) of them do not require money.
Some might finally think: you are a big speculator, volatility and an options trader, why are you short after all this (f*****g cynical) speech ? Regarding the VXX, I can only reply that I am basically constantly short, without paying much attention to the market, without buying or selling. I am short not because I have an idea where the market will go but because I believe the VXX is structurally designed to lose its value in the long run (I also might be wrong there). It loses value due to the fact that VIX futures are most of the time in contango, and that reduces the contract base. The contract base are just the number of futures that the VXX has. Since contango means a higher price for the second month future, then less 2nd month contracts can be bought with the sales proceeds of 1st month ones, therefore the contract base falls, (hope you got that)! Since that happens most of the time the VXX converges to 0, but due to reverse splits and new issuance, it never reaches it.
The same happens with several other ETFs that are affected by contango, like Oil ETFs (example: USO). Just to illustrate: With a 10% contango, very common these last weeks the VXX loses 10% per month, even if the volatility remains stable. In other words, every day it loses half a percentage point just due to that, the clock is running, tic, toc, tic, toc….
The same market philosophy goes for the companies I buy. I give there even less importance to market trends, unless they offer attractive prices. I buy when good a good company, its stock, bond or options, are, based on valuation, cheap relative to their market price. Those opportunities appear more when the whole market is down, so I add more in those times. I do not buy, or restrain from buying, because I think I know the market trend. I have no idea nor care much about it. I do care in the sense that I actually prefer “bad” markets, because I am deploying cash and plan to keep on doing it, for at least, many more years, so being a net buyer, I prefer buying on discount :).
Note: Please do not conclude neither that I hate speculators or traders, I have the biggest respect for George Soros, and the popular book Reminiscences of a Stock Operator, by Edwin Lefèvre, which is based on the famous trader Jesse Livermore’s life’s story, is one of the best books I’ve ever read on the subject (I learned about that book via Charlie Munger, if you want it feel free to contact me, it could be a nice gift for all you traders! :)).