Chart: VIX Futures Front Month Daily Roll

As a follow up to VXX in the 'New Normal' I have graphed the VIX futures front month daily roll yield based upon settling prices going back to 2004.  Although charts are available of the VIX short-term futures index historical performance, I have been unable to find a chart of the historical daily roll.  This chart helps visualize how the current consistently steep term structure did not exist in the 'old normal.'  However, late 2006 into early 2007 came pretty close with the cash VIX trading near ten.

The daily roll yield since July 2010 has averaged negative 12%.  This is the lowest 6 month average roll yield since VIX futures began trading in 2004.  For perspective, the average roll yield over the entire graph is negative 5%.

With a single exception on November 6, 2010 of negative 2.5%, the daily roll yield has not breached negative 6.5% since July 6, 2010.

An average of ~5% of the contracts in VXX must be rolled daily (100% of contracts / 22 trading days per month).  VXX provides current contract concentrations updated nightly.  A long-term investor's return in VXX is largely determined by the average daily front month roll yield during the investor's holding period.

Disclaimer: Dataset created via Excel manual process

Source: CBOE settle prices

Note that December 2004, and April, July and September 2005 did not have contracts.  In these cases, I graphed the difference between the two front-most contracts.  Some of the noise in 2004 and 2005 can be attributed to this.

Roll Yield = (Front Month - Second Month)/Front Month * 100

Disclosure(s): Short VXX at time of writing

VXX in the "New Normal"

The VIX futures (quotes) term structure is upward sloping, or in contango, the majority of the time and only enters backwardation during VIX spikes.  Someone used to a 1-2% front month negative roll yield in the oil futures may be shocked by the 10-20% front month negative roll yield that can exist in the VIX futures market.


To summarize from the VXX prospectus, the VXX rolls its VIX futures holdings daily to maintain holdings with a weighted average of 30 days until expiration. Someone with an infinite time horizon who never suffers a margin call from a VXX short is almost guaranteed to make a large return.  Unfortunately, no investor has infinite margin along with an infinite time horizon.  The fact that VXX could easily double in the course of a week makes people afraid to short VXX, as it's still easy to borrow.  


The key to shorting VXX is to make it a pure mathematical trade and give up trying to time an entry point.  One such strategy is to dollar cost average 10% of your portfolio into a short VXX position over the course of a year.  Then add to the position to maintain the short as 10% of your portfolio.  I have begun doing this by selling out of the money Jan '12 LEAPS, and using the delta of my positions as a measure of my short exposure.


Although 2008 changed everything, a look at historical VIX futures prices (available since the contract began trading in 2004) makes it clear the steep term structure that exists today was not around during the "old normal."  After the trauma inflicted upon money managers in 2008 they are willing to pay a hefty price for VIX futures as portfolio insurance.  It has become popular to be prepared for the next black swan by holding VIX futures or calls, and the expected lose in these positions is considered a new cost of doing business.


Until the VIX futures term structure flattens when the cash VIX is under 20, I will remain short VXX.  I think the steep term structure is here to stay though.  Otherwise, the insurance would be too cheap.  The possibility that something "Too Big to Bail" is only a few months away is too great.

Disclosure(s): short VXX at time of writing

2010 Annotated Performance Chart

Wish more people were as candid.

Graph from an Excel sheet where I keep track of account and S&P 500 daily close.  I'm annoyed that brokers don't provide this functionality.  Any brokerage could implement historical performance charting and index comparisons in a day.  My guess is they don't want their customers to be put off by poor absolute or relative performance.  Sites such as mint.com do a good job of filling this historical performance reporting gap, but get very confused about the value of a portfolio with short options or equities positions.

Futures Check

Looks like we're in for a futures ramp job to start the new year... as someone is trying to continue the 2010 pattern of a big up day on the first trading day of the month.  It has been even more pronounced when the first trading day of the month falls on a Monday.

You'll Think I Photoshopped This

An entry from 9/1/2010 that I didn't post:

*March 9, 2009.  2010 is clearly a typo as I don't think there was anything significant about March 9, 2010.  Googling "March 9, 2009" and hitting I'm feeling lucky yields March 9, 2009: The Day Stocks Bottomed Out.  Whereas "March 9, 2010" yields Final Fantasy XIII Out March 9, 2010 On Xbox...

Year End Wrap Up

Today marks the end of another great year.  I now have two years worth of good returns and feel that my trading style has evolved into something I am comfortable and confident in.  Part of that style is a recognition of constantly needing to evaluate positions and look for new opportunities in securities I am unfamiliar with.

The books I've read this year (in no particular order) to help formulate my mental strategy:

1. Stalking the Black Swan by Kenneth A. Posner
2. Fooling Some of the People All of the Time by David Einhorn
3. Market Psych by Richard L. Peterson and Frank F. Murtha
4. Diary of a Hedge Fund Manager by Keith McCullough

"Fooling Some of the People All of the Time" and "Diary of a Hedge Fund Manager" were the best reads.  

I think David Einhorn and Michael C. Hall from "Dexter" should team up on a campaign for corporate governance accountability.  The similarity between shorting with the desire to bring fraudulent companies and executives to justice, and Dexter's dark passenger are eerily similar.  My best short of the year was semi-Dexter inspired.

I came across a deposition of Tammie Lou Kapusta with serious allegations of fraud against the offices of David Stern.  It's something you read that makes you say "How can this happen?"  I then discovered that David Stern had a portion of his business go public, DJSP Enterprises Inc. (DJSP).  Normally, I wouldn't touch a penny/dollar stock, but after watching the season premiere of Dexter I felt morally compelled to short this company and put 10% of the portfolio against it.  Shorted at $3.13 and covered at $1.12 a few weeks later.

My best long of the year was Apple, which probably doesn't need any explanation.

The blogs that I've been regularly reading this year:

1. VIX and More - I've been paying more attention to the VIX, and more importantly the VIX futures.  I've had some success selling some VXX LEAP calls.  
2. Hedgeye (from author of "Diary of a Hedge Fund Manager") - Hedgeye gives some great insight into macroeconomic trends about a month before the MSM catches onto the same themes.
3. FundMyMutualFund - just entertaining, Trader Mark also has a good (vindictive) feel on market or HFT sentiment.
4. MercenaryTrader (recent addition) - A couple of anonymous swing traders that post some well-thought out trade ideas.

Happy new year to all!