How Closely Does The VIX Short Term Futures ETN (VXX) Track the VIX?

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May 24, 2010 8:17pm NYSE:VXX

“A reader recently asked me about the correlation between the spot VIX and iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX). I know it’s not exact, but for a 10% move in VIX, how much

 would (VXX) move on average?  He is correct; it’s not exact. But, as a general rule, (VXX) captures about 50% of the daily move in the CBOE Volatility Index (VIX). So, if the VIX moves 10% in either direction, (VXX) will likely move about 5%, in the same direction,” Adam Warner Reports From Options Zone.

Warner goes on to say, “Options traders always anticipate mean reversion from the VIX. That is, what goes up in the very short term, will go back down in the modestly longer term. (VXX) tracks a hypothetical 30-day futures on the VIX. A 30-day future simply tells you where Mr. Market expects to see the VIX exactly 30 days from now. It’s a snapshot; it’s not a commentary on the path it will take to get from here to there. So let’s say the VIX lifts 10%. Does that influence your opinion of where you expect to see the VIX exactly 30 days from now? Perhaps modestly. But would you ramp your bid for a VIX future up 10% on that? Almost certainly not. Rather, you’d find some middle ground between leaving it untouched and anticipating the full 10% lift to hold.”

“In other words, you price in some sort of mean reversion. If you believe that “mean” really is 10% above the previous day’s VIX reading, you’ll tend to bid up the future. But if you believe the VIX rally is just a blip, you will not bid the future up significantly. In the short (about 16 month) life of the VIX, these forces have translated to about a 50% correlation on a day-to-day basis. That’s solely a guideline, however, and far from a hard and fast rule. For example, if the VIX itself is on the high side, (VXX) will clearly underperform to a greater extent on rallies. Plain and simple, when the VIX is near 40, no one reasonably expects it be higher 30 days from now. Thus, further VIX lifts from there are met with relatively weaker rallies in VIX futures. Conversely, with the VIX near 15, it’s quite the opposite,” Warner Reports.

See more to the article: HERE

Here are some more details we have put together on the iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX)  below:

iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX)

The investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

Chart foriPath S&P 500 VIX Short-Term Futures ETN (VXX)

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