Lost In Translation: VXX And VXZ

Partly based on some thinking I laid out last week in Some VIX Milestones…and a Prediction, I was fortunate to be long VXX (VXX), the iPath S&P 500 VIX Short-Term Futures ETN, going into yesterday’s (Monday) session.

VXX notched a nice one day gain of 7.40%, but this was less than half of the 15.44% gain in the VIX (^VIX). On the other hand, VXZ (VXZ), iPath S&P 500 VIX Mid-Term Futures ETN, which targets VIX futures approximately five months out, moved a mere 3.41%, less than half of VXZ. As shown in the chart below, VXZ’s jump did not even match that of the 4.28% drop in the S&P 500 (^GSPC).

All things considered, these are about the percentage moves relative to the VIX that one should expect. I have previously discussed the relative juice factor in VXX Data Now Painting an Accurate Picture and elsewhere, but apparently not everyone has internalized this information yet. Further, if you follow any of the term structure discussions here, the volatility predictions as a function of months into the future is a recurring theme.

With almost three months of data to draw upon, VXX is now averaging close to 50% of the daily move in the VIX and VXZ is averaging approximately 20% of the daily move in the VIX. The bottom line is that if you are looking for the type of moves generated by the cash VIX, your best bets are VIX options, VIX futures or a 2x leveraged play on VXX.

Personally, I find VIX options to generally be the most attractive way to trade the VIX, given their liquidity and the flexibility inherent in structuring a wide range of options positions.

[graphic: VIXandMore]

Disclosure: Long VXX at time of writing.

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