The Comeuppance For VXX ETN Bulls (VXX, VXZ, XIV, VIXY, TVIX)

Tyler Craig: After being the beneficiaries of an uncharacteristically strong and lengthy tailwind, the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX) bulls may be about to receive their comeuppance.  Currently there is a trio of obstacles which may finally slay the beast haunting the nightmares of VXX bears everywhere.  Barring some Eurozone induced volatility spike, this triple threat is likely to hasten the long awaited return of the day-by-day demise of this increasingly popular, yet fatally flawed volatility ETN.

Threat number one comes in the form of November futures expiration slated for this Wednesday morning.  The positive roll yield captured as expensive November contracts were rolled to notably cheaper December contracts is soon to be a thing of the past.  What was once looked at as a benefit to the fund is now a detriment.  As the front two expiration months flip from backwardation to contango, the yield from rolling from one month to the next has turned from positive to negative.  With Dec VIX futures contracts trading around the 31 level and Jan trading at 32.40, a cost will be incurred as front month futures are incrementally rolled to the second month.

Threat number two comes by virtue of the calendar.  From a seasonal standpoint the end of November through beginning of January is not known for epic volatility.  The numerous holidays coupled with lower trading volume may likely usher in a more docile environment.  While one could make the case that Dec VIX futures are already baking some of these lower vol expectations into the cake, 31 is still quite high and has plenty of room to decline if some semblance of normalcy returns to the marketplace.

The third and final threat arises from a  technical observation of the market.  Simply put, things are more stable.  The S&P 500 Index has now been above its 50 day moving average for a month.  Dips have been bought with some consistency.  And we have some Q4 bullish seasonality to boot.

Throw it all together and we’re in an environment conducive to selling rallies in the VXX versus buying dips.  While I wouldn’t count out the appearance of the occasional volatility spike from nowhere, I like the idea of using pops in the VXX to initiate bearish type plays.  Put calendars in particular look intriguing to me here.

Related: ProShares VIX Short-Term Futures (NYSEARCA: VIXY), VelocityShares Daily 2x VIX ST ETN (NYSEARCA: TVIX),  iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX), iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA: VXZ), VelocityShares Daily Inverse VIX (NYSEARCA: XIV).

Written By Tyler Craig From Tyler’s Trading

Tyler Craig, author of Tyler’s Trading and owner of TC  Trading, Inc. Over the years I’ve educated hundreds of traders through my work with one of the nation’s leading educational firms. I enjoy writing and am a current monthly contributor to the Wealth Intelligence Magazine.  My writings have also been featured in Expiring Monthly and frequently show up in the Abnormal Returns Options Newsletter.  In 2009 I started Tyler’s Trading to share daily market commentary on stocks and options.

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