It Works until it Doesn’t

I recently owned some $VXX puts and sold them on Friday.  It was a sort of continuing trade over the last few weeks of puts and short positions which I finally closed out.

$VXX is the iPath S&P 500 VIX short term ETN.  The VIX is a measure of volatility in the market.  Simplistically, the VIX generally goes up when the overall market is falling, and vice versa.   

In response to an inquiry, I had a civil discussion with @allgoodtrades (Gavin) on Stocktwits about where the $VXX was going next.  He thought it would fall, and I was concerned about it spiking higher if there was a correction (crash) on Monday, August 4^th.  I was staying on the sidelines.

Gavin challenged me to look at the chart and find another time in the last three years where $VXX rose as much as it did in the last three days.  It’s very hard to see that in a chart, so I ran the historical prices in Yahoo! Finance.

Over the three days ending 8/1/14, $VXX went up 15%.  In running the numbers, I found nine times where the $VXX went up 15% or more over the last three years, actually a little less than three years, more on that later.

Although this wasn’t as unusual as Gavin thought, I did something interesting.  In each of the nine times the ETN ramped over a three day period, in closed lower on the fourth day.  Nine out of nine.  It’s hard to beat those odds.

The VIX in 2011

Unless you go back the full three years.  In August 2011, the $VXX had a spike that kept on going.  Check out the closing prices from that period.

8/22/2011	43.86
8/19/2011	42.55
8/18/2011	40.47
8/17/2011	33.53
8/16/2011	32.87
8/15/2011	32.18
8/12/2011	34.13
8/11/2011	33.78
8/10/2011	35.17
8/9/2011	31.26
8/8/2011	34.78
8/5/2011	30.31
8/4/2011	28.89
8/3/2011	24.08
8/2/2011	23.97
8/1/2011	22.41

So, which do you believe?  Nine out of nine times during a great bull market, or the one time when it looked bad for equities?  Do you think the market we have now is the same as the last three years, or are we in for the rough ride like we had in 2011? 

Honestly, I don’t know, but the risk is pretty great, and for me, worth watching from the sidelines. The point is that if you find something that works every time, it’s still not guaranteed to work the next time.  The situation may be different.  It works until it doesn't.

And by the way, the $VXX wasn't around in 2008, but you imagine what would have happened to $VXX or it's more leveraged cousin $UVXY when the market really crashed

Good luck.  We’ll know shortly.  Nothing in this post is a solicitation to buy or sell securities.