VIX: Was the Trade Profitable?

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 |  Includes: VIXM, VIXY, VXX, XVIX
by: Lee Eugene Munson, CFA

Co-written by Jonathan Gake

Now that Congress has decided that Armageddon was just a ploy to manipulate the American public into promoting extreme political views to energize the polarizing base of each party, we have closure to the volatility trade. Yesterday I set out the best tools to use in playing volatility leading up to this historical fear campaign, only to reveal that using retail-oriented products is a losing game over the long term. Regardless, for those that don’t have the stomach to trade cash settlement options on the VIX (I don’t blame you!) you have the VXX and VIXY to play with.

My main conclusion from yesterday was that both these products are fine for an intraday move, and if you feel lucky an overnight play. So, how would you have done if two weeks ago, a week ago, last Friday, and yesterday had you attempted to play Congress like they played us? We took the average price from one and two weeks ago since the VIX moves fast and you would have had time to stage your position. Then Friday we took that closing price, assuming you were waiting for any last minute news. Finally we took the opening and closing price on Monday. Our approach was simply to look back and give the reader some perspective, since apparently the media gave no quarter for rational thought.

Here are the results:

Table 1: VXX vs. VIXY Returns

Two Weeks Ago

One Week Ago

Last Friday

Monday

Buy

7/18/2011

7/25/2011

7/29/2011

8/1/2011

Sell

8/1/2011

8/1/2011

8/1/2011

8/1/2011

Price

Average

Average

Close

Open, Close

VXX Return

-4.62%

5.82%

-4.27%

1.13%

VIXY Return

-4.71%

5.69%

-4.20%

1.23%

Click to enlarge

As you can see, timing is everything. But, timing is nothing if you stay too long in the VXX or VIXY trade. Some readers have written to me asking about selling calls on VXX if it is so bad at time decay. That is a solid concept, but you can lose your shirt by being short in times of a big volatility jump. In short, it’s a great idea, but it has too much risk for investors who can’t suffer unlimited losses. We often look at selling volatility through short puts or calls on USO because of contango. We can leave that for another time.

The bottom line is middling. Working directional bets with stocks or even bond ETFs would be a better risk return for even the most degenerate gamblers. Our firm is now committed to keeping people apprised of how to debunk and unbundle ETFs going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.