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A date with the devil: peeking at VIX related ETFs and ETNs



May 27, 2011 – Comments (27)

Lets talk about a couple of those amazing, decaying, spiking, then decaying once again messes that are VIX related ETFs and ETNs.  It seems like every other article on seeking alpha has some hedge-fund-manager-wannabe recommending that people buy them.  Guys on Real Money Silver are long them.  Famous bloggers talk about them, they are considered by so, so many to be an "intelligent hedge".   After last summers fireworks, VXX has gained asort of following that just doesn't go away.  TVIX is like double-leveraged VXX, and I have seen this recommended here and there also.

The only downside to these things is that they can decay (and a state of decay is their "normal" condition) through contango (like many other ETFs and ETNs).  If anybody doesn't understand contango and how it can affect ETFs and ETNs, please ask and I will explain.  I have seen some decent explanations of why this happens on the web, but never a thoroughly excellent one.  But I digress.  

This decay creates a situation where if you are "wrong", you lose money, if you hold for a very very long time you are all but sure to lose money, and where good timing (or extreme events) are needed to make money.  t is difficult to make money going long these things. 

But, as I frequently short these broken ETFs because I hate them, and because it can be a nice way to make money, and as I have suggested to others including you folks that this may be an advantageous strategy...   And because a couple of friends have taken it to some kind of braindead extreme (and won, recently), I thought it would be necessary to take a look at the downside to short-selling these things.  

In essence, I will show that bets long or short these types of securities are essentially bets on or against abnormal market conditions.  To short sell VXX is quite literally to bet against a "black swan".  To go long it is, more or less, a bet that one will occur.  Unless you are focused on very short timeframes.  

Pro's of positions in these ETFs:

-going long - some of the most potent protection you can find against truly dramatic market drops, against "black swans".  

-going short - you have a substantial "tailwind" in the decay in many market conditions, nay in most market conditions 

Con's of positions in these kind of securities:

-going long - you're running uphill and with the wind, over any type of long period of time you almost literally need to have a truly dramatic market event to win

-going short - being short these things is one of the least "black swan proof" things you could possibly do.  If things get really ugly, this will be really a bad position to be holding.  

In the next post i'll pony up some graphs of historical (including pre-lehman brothers) performance of these things.  For some reason I can't post pictures in my initial post, only in replies.

27 Comments ā€“ Post Your Own

#1) On May 27, 2011 at 10:48 PM, checklist34 (99.06) wrote:

I have "reverse engineered" these things (and most of the leveraged ETFs on the market) and dug up old data for the underlying, so as to be able to analyze a longer set of data than currently exists.

This first pic just shows the last 6 months or so of TVIX and VXX, as calculated.  The VXX calculation contains a full 2 years of calculation error (compounded), so its pretty close.


This pic shows historical VXX, back to when VIX futures began trading monthly, as calculated by me overlaid with reported VXX closing values: 


Some significantly scary events in there including:

60% spike in early 2006

doubling from spring 2007 tosummer 2007 (and it didn't come bak down for quite some time)

330% rise around Lehman, with no pause or hesitation, just a rapid maniac rise.  

50% rise in the first few weeks of January 2009, before it started trading on the exhanges

Point:  exactly as I said above:  in the right situations, this is a great short.  Going long it for any length of time is basically a bet on strange and abnormal circumstances.  But HOLY COW could being short this on a large scale murder you.


This pic is VXX and TVIX (double leveraged daily VXX, more or less) historically:


A better short than VXX, a far worse thing to be on the wrong side of.  130% rise in early 2006, near quadrupling in mid 2007, rose FIFTEEN TIMES around Lehman, doubled in early Jan 2009, and tripled around the Flash Crash.  

Being short it has been a huge winner, being short it in size would have left you bankrupt several times.  Seller beware.

Buyer beware just as much. 

And for fun, my reverse engineered calculations of TZA and TNA, I have these back into the 80s and also FAZ, FAS, etc.  etc.  etc.  


Not too shabby, eh?  


To summarize:  shorting these broken ETFs and ETNs is probably a good idea, but some common sense is necessary:

-short them in modest size

-short them when the VIX is already high so that mean reversion is on your side.  Don't short them at VIX 10, short them at VIX 30 or something. 

-if anybody wants, I can offer a simple recipe for short selling these things, as long as everybody promises to do it in modest quantities so I don't have to listen to any stories about people going broke, like my friend Roger is going to do one of these days all leveraged, unhedged, to the max short VXX.

-literally, positions in these type of securities are a bet for or against abnormal market conditions.  Shorting them is not "free easy money", its money with a very significant risk.  That risk being abnormal market conditions.  "Black Swans" if you prefer.

People who like gambling should never play in markets.  This is the rule of the Checklist.  


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#2) On May 27, 2011 at 10:55 PM, checklist34 (99.06) wrote:

On a side note, since last October I have lost 26 pounds, falling from 217 to 191, and I can do a set of bench press with more than I weigh for the first time in at least 10 years.  I can also jump up and grab a basketball rim again for the first time in many years, probably 10.  

Recently I plateaued at around 196, so I quit drinking, which led to an easy loss of 5 more pounds.  My goal is to get to 185 and dunk a basketball again, one more time, before I'm too old to run around and jump and stuff.  I'm 6'1, and can't palm, so this will take probably 6-8 more inches of vertical. 

If I keep not drinking maybe I can do that by the end of summer.  Its nice ot be in better shape again, after 10 years of being locked in an office a hundred hours a week eating crappy food.

I did it by ditching restaurants completely 5-6 days a week, trying to order fish instead of a burger the other 1 or 2, ditching fast food copmletely, almost totally ditching stuff like pizza when i'm at home with my son.  And by excercising 3-4 days a week, running stairs, lifting weights, and playing basketball at the gym with the kids.  When I go and they aren't asking me to play a game of horse or something, I just shoot jump shots over and over, jumping as high as I can, and stuff like that.  

No jogging, because I hate it, not too strict of a diet, and no gimmicky anything.  

In the end though to truly get back in shape at my age will probably mean no more drinking for awhile.

no more drinking makes for a more boring checklist who doesn't hang out with his zillion friends as often, causing them to get mad at him.  

I'd like to say my mind is way sharper now, but its not really.  Physical and mental fitness aren't so correlated as people think in my expereince. 

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#3) On May 27, 2011 at 11:09 PM, rebello15 (< 20) wrote:


 can you please go into detail about contango and how to short these guys.

 Thank you!


good to see that your getting back into shape!

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#4) On May 28, 2011 at 12:49 AM, ikkyu2 (98.57) wrote:

I wouldn't spit on a "truly excellent" explanation of contango-related losses in these ETFs.

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#5) On May 28, 2011 at 12:54 AM, TMFAleph1 (93.09) wrote:

Great effort, checklist! I've been fascinated by the VIX index for a little while now, but I've never really considered fooling around with the ETNs for some of the reasons you mention.

Mainly I like to think of the VIX as a contrarian indicator -- when it is significantly below its long-term average (roughly 20, if I recall correctly), the appearance of stability bothers me. Low valuesare a sign of excessive complacency -- particularly in an environment as uncertain as this one

Here's an article I wrote on teh VIX back in April:

Investors: See No Risk, Hear No Risk

Enjoy the Memorial Day weekend!

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#6) On May 28, 2011 at 1:25 AM, tdonb (21.95) wrote:

+1 and following


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#7) On May 28, 2011 at 9:15 AM, dbjella (< 20) wrote:

Check, good for you in trying to get healthier.

I am not sure what your drink of choice is, but any clear alcohol with soda water works for me in losing weight.  I drink pretty heavily for 2 days about every week and a half :)  For every 2 drinks, I drink a glass of water.  You have to pee a lot, but it really helps shorten the time I go back to losing.  That along with avoiding late night drunken snacks.  Damn, it is tough getting old.

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#8) On May 28, 2011 at 2:27 PM, checklist34 (99.06) wrote:


     To short them you can take all of the normal options:  buy puts, borrow shares and short them, sell calls, put spreads, etc.  

      When to short them is a better question, some general guidelines are these:

1)  short them when volatility is already high.  A VIX above 30 is a rare and (usually) transient condition.  It can go much, much higher (80+ after Black Monday and Lehman, 40+ after 9/11, after Long Term Capital Management blew up, in the banking crisis in the early 90s, after the Flash Crash last summer, in the bear market of 2002).  A VIX above 40 is a rather rare occasion.

By following that rule you would ensure that mean-reversion favors you, and isn't working against you. 

Shorting in late 2006 or early 2007 with the VIX near 10 (lower than its historical average) would have left you 500% underwater at one point (after lehman) and you'd have waited 4 years to get back ahead (assuming you didn't get a margin call after Lehman, which you would have, crystallizing the losses).  

2) short them in small quantities.  Say 5% of your portfolio on a spike above 30, and 10% on a spike above 40 (assuming the 5% you shorted above 30 hasn't risen to 10% by then)

3)  don't short them when the futures curve isn't in contango


Those are a general, but decent, set of guidelines.  Treat it as an extra "dividend" to your porfolio, not a strategy, unless you want to tolerate enormous volatility OR have a more elaborate plan that just shorting the things.  

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#9) On May 28, 2011 at 2:30 PM, checklist34 (99.06) wrote:

ikkyu, I can do that.

bullnbear, I think in the past I have been too broad in recommending that people short some of these "broken" ETFs and ETNs.  

I never realized the danger of such a recommendation until my friend Roger went all "full monte" leveraged-up short VXX after I suggested it.  He could wake up with no money on Monday if something messed up happens over the weekend.  

I am extremely fascinated by VIX and its derivatives.  I have probably studied these things as much as anybody.

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#10) On May 28, 2011 at 2:34 PM, checklist34 (99.06) wrote:

dbjella, maybe i'll give that a try...  thanks.

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#11) On May 28, 2011 at 3:19 PM, SultanOfSwing (32.43) wrote:


Can you explain how you reverse engineered TNA/TZA, FAS/FAZ, TVIX, VXX to extrapolate prices prior to the creation of these ETFs and ETNs?  I haven't figured out how to do this.


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#12) On May 28, 2011 at 4:27 PM, HarryCaraysGhost (77.10) wrote:

Hi Checklist,

I'm more interested in these inverse things for Caps use. I've been toying around with the idea of just red thumbing FAS/FAZ, DIG/DUG etc...etc.

If I had a timeframe of end o' Sep, would'nt I be right on both calls? Just end after five points and then start again.


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#13) On May 28, 2011 at 4:57 PM, checklist34 (99.06) wrote:


     Just read the prospectii, made some spreadsheets trying to enter in all of the variables (interest rates, values of the underlying, etc) and piece it together until the curves fit.  


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#14) On May 28, 2011 at 5:01 PM, checklist34 (99.06) wrote:


     Well I don't know which direction any of these will be heading next.  VXX and TVIX will underperform if the market is flat or up, and may well underperform if it goes down to from now until september.  

Basically, the "bear" ETFs can be shorted for CAPs at any time and you will eventually win.  FAZ, TZA, VXX, TVIX, etc.  You may lose, or lose badly, for awhile, but you will eventually win if you SHORT them, red-thumb them.

Green Thumbing them will eventually lose, so must be a short term trade.

The leveraged bull ETFs can win over extremely long periods of time.  For example, TNA per my calculations has substantially outperformed the Russel 2000 over the last 20 years.  

So red-thumbing the leveraged bull ETFs is not an entirely safe bet and could leave you permanently underwater.  

There isn't any guarantee that green-thumbing the leveraged bull ETFs will eventually win, either.  

The "sure thing" play for CAPs is to red-thumb leveraged bear items on downdrafts in the market.  If you're wrong, or even horribly wrong, for a time, eventually you will be bailed out by decay and the market nonetheless.  

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#15) On May 28, 2011 at 5:03 PM, checklist34 (99.06) wrote:

some perspective on how volatile these things can be, and how shockingly they can move against you under certain conditions:



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#16) On May 28, 2011 at 6:40 PM, anchak (99.89) wrote:

Good post- you obviously know how I stand on these.



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#17) On May 28, 2011 at 7:39 PM, TMFAleph1 (93.09) wrote:

Here's a graph of the VIX index (in blue, left axis) against the S&P 500 (in green, right axis):

VIX Index vs. S&P 500, 1990 - Q1 2011

Image and video hosting by TinyPic

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#18) On May 28, 2011 at 7:57 PM, TMFAleph1 (93.09) wrote:

A recent FT article on this very topic:

Beware the pitfalls of 'fear gauge' funds, FT, May 27, 2011

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#19) On May 28, 2011 at 8:15 PM, xpeng (< 20) wrote:

I wish I had read this article two years ago! I have been betting against the market using these bear ETFs and I have lost dearly over long term. I still think that a "black swan" event will come in the not-so-distant future, but the thing is that anytime the market is down, it will be up in a week or so, so the VIX does not spike much. In order to win with short ETFs, one needs reare occasions such as post-Lehman. However, I am also worried about shorting them because of potential of sudden spike of over 100% in very short times. It is truly a date with devils.

Next time VIX goes above 30, I will surely buy some puts of TVIX or VXX. Otherwise, I'll remain on the sidelines.

Thanks for a great article, but I was unable to find the explanation of contago, can you please add that?

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#20) On May 28, 2011 at 8:24 PM, TMFAleph1 (93.09) wrote:

From the article I link to in my previous post:

ā€œIf you had to guess which product will have the lowest return over the next year, then the odds of it being TVIX are high,ā€ says Nick Cherney, who created the product as co-founder of VelocityShares and does not seem upset by this at all. Nor should he be. Not only is caveat emptor the operative phrase for investors, particularly those thinking of owning it for multiple trading sessions, but one might say it is the raison dā€™être of the entire asset class. Despite being capable of losing 95 per cent in a year, there were nine trading days this year when TVIX had intraday double-digit percentage gains and a few, with news from Libya or Japan, where 25 per cent was possible.


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#21) On May 28, 2011 at 8:25 PM, anchak (99.89) wrote: this


VIX futures are monthly - and VXX and TVIX both do near-term....


VZZ does medium-term - and spreads it out.


So one idea would be to possibly short VXX and long VZZ - as a hedged trade


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#22) On May 29, 2011 at 12:53 AM, checklist34 (99.06) wrote:

thanks anchak, and option.

bullnbear, thats a nice chart, thanks for adding it.  VXX TVIX, etc,. dont' trade the VIX, they trade VIX futures, so they never track the VIX too accurately.  After lehman they actually rose much more than the VIX, and often they don't rise nearly as much (like this mess with Libya and Japan earlier this year, the VIX doubled, VXX rose like 30-odd percent or osmething).  

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#23) On May 29, 2011 at 12:57 AM, checklist34 (99.06) wrote:


yep.  I meant copmletely the title to my blog.  

Imagine somebody that went all in long VXX when it was started (imagine in started in late 2005 when my graph starts).  Guess what?  They lost all their money.  

Imagine somebody who went all in short VXX when it was started (imagine it was started in late 2005 when my graph starts).  Guess what?  They lost all their money too. 

Same for TVIX.  Both longs and shorts, had they gone all in when it was began, would have lost all of their money.  

Longs lost because of the decay.  Shorts lost because in the incredible fireworks after Lehman (or even the flash crash) you'd have gotten margin-called to the point of liquidation and sent home with a consolation lollipop, but your money would have probably been gone if your position had been large.

Not too many securities you can say that about.

Everybody loses over very long periods of time if they are aggressive with these things.  

No way I go long these things in any size, ever.  I do short them frequently, but I am a somewhat depraven individual, prone to seeking anti-boredom in life.  

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#24) On May 29, 2011 at 12:58 AM, checklist34 (99.06) wrote:

VZZ is leveraged so has extra decay.

VXZ is unleveraged mid-term futures, and it decays at a much lower rate than VXX (somewhere around 1/2 as much decay or so, it varies).

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#25) On May 29, 2011 at 1:02 AM, checklist34 (99.06) wrote:

The creation of these ETNs is one of the single biggest pieces of hosery ever wrought upon markets.

Its an ETN, people, VXX.  They created like X number of shares and sold them.  In 2019 they pay out X* the remaining value, which will be about 8 cents.  

They sold those shares when the VIX was at a 3-times-in-a-century high, and I am quite sure they knew fully well that in 2019 they werne't going to have to pay out diddly squat, becuase no value would be left.  

Its the biggest crock of crockishness ever.  A free, riskless, $1B for Barclays.  

golf clap

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#26) On May 31, 2011 at 2:56 PM, TMFAleph1 (93.09) wrote:

I have nominated this post for Post of the Day.

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#27) On June 12, 2011 at 11:35 PM, TMFAleph1 (93.09) wrote:

Hi checklist,

I thought you might be interested in the following papers:

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