The Long Tail o...'s  Instablog

Abstract

Investor demand for trading vehicles that allow one to express a view on volatility, irrespective of underlying price direction, has spawned a plethora of exchange traded products. Some have been wildly successful, while others have failed. One relative success has been the exchange traded note (ETN) referencing the S&P 500 VIX Short-Term Futures Index Total Return, or VXX. However, despite its success as a product introduction it turns out that VXX does not entirely succeed as a vehicle for trading or hedging volatility (as defined by the VIX index). Challenges for the VXX are driven mainly by persistent VIX futures curve contango, and by how the underlying reference index, SPVIXSTR, is defined, which in turn has the undesirable quality of creating non-perfectly positive correlation with the VIX Index. Taken together, these shortcomings can make VXX a poor choice for trading or hedging volatility.

The full blog article can be found here: www.thelongtailoffinance.com/SA/Dissecting_the_VXX.pdf