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Aug 2, 2016

VXX Strategies in Low Vol Environments

By:Sage Anderson

Looking at a chart of either the S&P 500 or the VXX since the start of the year, one can see fairly clearly what has transpired thus far in 2016.

Overlaying the two charts, valleys in the S&P 500 correspond closely with peaks in the VXX and vice versa. The first valley in the S&P 500 at the start of 2016 was associated with the lows in crude oil and the second dip with the initial surprise of the British decision to exit the European Union.

If you've been trading the market since the "Brexit" referendum, you know all too well that the S&P 500 has climbed to new all-time highs, while the VXX has dwindled down to its lowest levels of the year.

So given the current market environment, you may be debating how to position your portfolio for the next couple of months or even longer.

Certainly, a short premium approach paid handsomely in the wake of "Brexit." Depending on your strategy and approach, any potential increase in volatility could offer an opportunity to add to your short premium position - depending on the level of uncertainty surrounding future binary events.

While it's not always clear how one should deploy risk, it can be helpful to understand what strategies may not be ideal for current market conditions (i.e. process of elimination).

Two recent episodes of Market Measures analyzed some trading strategies in the VXX that may provide information helpful to your ongoing positioning in the market.

The first, entitled "Getting Long Volatility By Selling Puts in VXX," examined whether this strategy has been successful in recent years.

The question asked by the Market Measures team was effectively whether a short put strategy has been consistently profitable in low volatility environments.

To answer this question, a study was run on the VXX using the following parameters:

  • Using data from the VXX, 2010 to present

  • Sold 16 delta put

  • Entered the position every business day

  • Compare results when the VIX was below 12,13,14,15

  • Held through expiration

A closer analysis of the results is particularly important in this case because the probability of profit was above 80% for each of the strategies, but the average P/L was negative for all of them, as shown below:


As noted by Market Measures hosts Tom Sosnoff and Tony Battista, the problem with this strategy appears to be related to the fact that as the VXX goes lower, the amount of premium available to sell also gets depressed. Additionally, when the team re-ran the study using various profit-management strategies, they still weren't able to uncover an average P/L that would support consistent deployment of the strategy.

The good news is that the Market Measures team conducted additional research on the VXX and did find a couple approaches that may be more widely applicable given the average P/L produced by backtesting VXX data.

One of the strategies examined on this episode, entitled "VXX Strategies," incorporated the sale of upside calls in VXX. Due to the complexity of the material, we recommend you watch the entire episode for the best possible understanding of the material via this link.

It's entirely possible that you may be successfully utilizing the VXX in your portfolio using a method that contradicts the results outlined in this post. If that's the case, we welcome you to leave a comment below or reach out at with additional feedback.

More information on volatility measurements such as VXX can found by following this link.

Thanks for reading!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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