VXX represents a VIX future expiring in exactly one month

VXX represents VIX future expiring just one month from today. That is because the VXX is the weighted average of its 1st and 2nd month VIX futures. For example at the renewal of the VIX futures you have 100% of 1st VIX futures and exactly one month left for them to expire, as every day passes you have less 1st month VIX futures and more second month ones, that is because every day a fraction of 1st month VIX futures are sold to buy 2nd month ones. So when you multiply the price of the 1st and 2nd VIX futures by their relative amounts you obtain exactly a weighted VIX value that represents a VIX expiring in just one month. You can find the dollar weights here (in the VXX data spreadsheet they are represented by the 1st and 2nd # of contracts):

Remember this: the VXX is the weighted average of the first two VIX futures front end months, weighted in such a way that they represent a one month VIX future. Therefore that is the number you should look at when trying to understand if the VXX is really high, low or normal. You do not have to only focus in its market value and historical performance because it is misleading due to the backwardation and contango effects, what you have to look at is at the weighted VIX.

How do you calculate that value: Easy! —> For example if the 1st VIX future is 18 and the second is 20 (VIX futures values are here) and you have 35% dollars of 1st VIX futures and 65% of the 2nd (VIX weights are here) then the weighted VIX is 1/(0.35/18+0.65/20) = 19.25, that value represents a VIX future expiring in just one month. In the spreadsheet the calculation is different because it works with # of contracts and not with dollar weights. As you see you can calculate it at any given time. If that number is quite below its historical average then you could say that the VXX is undervalued. So keep in mind that it’s not because the VXX fell a lot that it’s cheap, it could have fallen a lot but still not be undervalued if the weighted VIX is not significantly under its historical average. That is why that number is so important and the VXX market price should always be looked in relation to it.

PD:

This post was written inspired by someone who just asked me what the VIX weighted represented in the VXX spreadsheet:

2. What’s the purpose of “VIX Weighted”?

The post was my reply to his question, I think every VXX trader should know it.

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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4 Responses to VXX represents a VIX future expiring in exactly one month

  1. pacard says:

    Hi jrv,
    Thanks for the great explanation…..and answering my questions. :-)

  2. pc says:

    So, is your weighted VIX synonymous with the intrinsic value of the VXX (VXX-IV)?

  3. jrv says:

    No, it’s similar but takes away the effects of contango and backwardation which are built in into the VXX. It really tells you if the VXX is high or low taking away the distorsion introduced by contango and backwardation.

    For example now the weighted VIX is around 19.5 which is not low, nor high, even though the VXX seems really low but that is also caused by the fact that contango eroded its value in the last 10 or 12 weeks.

    The weighted VIX simply represents a future expiring in just one month whereas the VXX does not, it is a derivative obtained by selling 1st month VIX futures and buying with the proceeds 2nd month ones.

    Cheers!
    jrv

  4. Patrick says:

    jrv,

    I’m interested in learning more about the VXX shorting model. Can you please email me?

    Gracias!

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