VXX shorting model (sell signals)

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! :)).


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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10 Responses to VXX shorting model (sell signals)

  1. Pingback: VXX data and pricing model since VIX futures available (2004) | The Intelligent Investor Blog

  2. kainvest says:

    jrv, well said in your disclosure.
    Wondering how to buy your VXX data and model. thanks.

  3. jrv says:

    Thanks Kainvest,

    Its a long time… what have you been doing ?

    Regarding your question you can send the payment to paypal, 35 dollars or 27 euros if you are in Europe, and I send you the spreadsheet by mail.

    Here is the original post for more info.


  4. Wu-man says:

    Hi jrv,

    Your points are well taken. Right now it seems Ben Bernanke has the market under complete control but it’s seemed like that before. Not sure if you remember Sean Newman, a/k/a cube from the VXX board. He took a nearly $1 million portfolio and lost about 99% of the value between a scam called NIVS and then shorting VXX outright as well as calls when it was in the low 40s and went to 60. If he could have held he’d have at least 300K or 400K (the NIVS money was a total loss anyway) but instead he has under $5K.

  5. Ted says:

    Hi jrv,

    It’s Ted who paid for the original VXX pricing model last November.
    May I have this update version of VXX shorting model?

    This article reminds me of many things.
    Yes shorting VXX could be very dangerous.
    I selled my long TVIX position at $37 last August (50% return) and I bought XIV right after that.
    Then the price of XIV dropped from $11 to $4.
    I could have lost more than 50% of my portfolio if I sold XIV last year
    Fortunately, I held them long enough.

    A similar situation happened to me this year.
    I started holding a long TVIX position at the end of January.
    Now my position lost 50% of its value,
    and I’m still expecting more volatility in stock market.
    I couldn’t agree with you more that trading VXX is one of the most difficult things to do.

  6. jrv says:

    Hi Ted, well done holding last year. Hope all goes well for you.

    I just sent it to your mail.


  7. jrv says:

    Hi Wu-Man, terrible story about Sean Newman, I think I remember a similar story last year from the VXX yahoo message board, not sure if it was him though. Anyways 1 million blown is a disaster specially when it represents all your portfolio. I think the key is shorting an amount that will not destroy you if the VXX multiplies, like that you can hold on.


  8. Wu-man says:

    Hi again jrv,

    Yes I agree Sean’s story is very very sad. He has been forced to file for bankruptcy after covering VXX at almost triple today’s prices. It’s a hard thing to go from being financially independent to being a ward of the state.

    I think that shorting VXX with 25% of your money, and then rebalancing at the end of every year right before the usual VXX Christmas decline, is a decent option. Over time the expected return of VXX should be about -50% per year so that 25% of your money should average about 12.5% per year. This year is has already dropped 50% so it could even be down 80% or more by the end. Then if there is a black swan it should not be hard to hold on even if VXX triples. Cheers!

  9. Don says:

    It seems that writing weekly protected puts might work. It will capitalize on the volatility in the premium but is still short enough to avoid too much decay before expiration. If Black Swan hits, who cares!

  10. jrv says:

    Hi Don, that’s part of the reason why I sometimes sell covered puts on my short position.


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