Wednesday, December 9, 2009

Bookkeeping: Closing iPath S&P 500 VIX Short Term Futures (VXX)

As proposed in our initial purchase of iPath S&P 500 VIX Short Term Futures (VXX) this is one flawed instrument, much like the double and triple ETFs.  I wanted to see how it would act on a volatile day... yesterday the VIX jumped 7%+, and VXX gained just over 2% cheating me out of nearly 5% of return (yesterday alone!) and defeating the whole purpose of this instrument. 

The intent was to capture gains from this move - I bought on the 24th... just about perfect timing. (Dubai Friday happened 2 sessions later)

Instead I was handed this lousy gain

I should be up about 17% on my "go long volatility as a pseudo short" - but instead have a 1% gain.  So even with just about perfect execution I am handed a slap to the face.  This is very similar to when I bought a slew of double inverse shorts in October 2007... their underlying indexes eventually fell by 50% over a 1 year time frame and instead of gaining 100%, or even 50%, I lost money on most of them due to the structure of the ETFs.  [Dec 28, 2008: More ProShares Ultrashorts Tomfoolery]

At least this time going in, I was noticing the ETF did a poor job of tracking VIX, but it even surpassed my expectations on how lousy it would act.  With that I am dumping another "financial innovation" out of the portfolio and considering ulterior ways to benefit from any increase in volatility.  My first thought is buying very deep "in the money" call options on VIX itself in a very far off date like summer 2010.

Fool me once, shame on me.  Fool me twice...

No position

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