VXX is a volatility product designed to give traders exposure to changes in the VIX Index through near-term VIX futures contracts (/VX). Traders who buy VXX are anticipating an increase in the VIX Index or futures, while trades who sell VXX are anticipating a decrease in the VIX Index/futures! But, it is not exactly like this.
The VIX Index is not tradeable. It is a computed figure that measures a constant 30-day weighting by using multiple SPX options expiration cycles, as stated by CBOE:
You can observe that, although VIX And VXX are highly correlated, VXX is losing value as time passes, unlike VIX that shows an horizontal price movement. Like an option, it has some “time decay”. It can be easily noted in this small chart period of 4 months. Check below the chart for the past 3 years…
How does VXX work?
VXX tracks the S&P 500 VIX Short-Term Futures Index, which tracks the first and second-month VIX futures contracts, as stated by Barclays:
“S&P 500® VIX Short-Term Futures Index utilizes prices of the next two near-term VIX® futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts. This results in a constant one-month rolling long position in first and second-month VIX futures contracts.”
VXX’s goal is to track the daily percentage change of a 30-day VIX futures contract. Since there isn’t a VIX futures contract with 30 days to settlement on each trading day, they use the first-month and second-month VIX futures to achieve a 30-day weighted VIX futures contract. Check VXX trading examples.
