Bears want to cut volatility fund in half
Chris McKhann | email@example.com
Today's big trades are in the September 8 puts, with more than 20,000 trading. They initially priced for $0.21, followed by more buying at $0.22. It appears that the trader is buying those puts with an expectation VXX will to collapse over the next six months.
The fund and other similar products are not based directly on the CBOE volatility index because it can’t be traded. Instead it holds VIX futures, which have been in steep contango for months. That means successive contract demands a big premium over the previous one. Currently, with the VIX at 14.76, the April VIX futures are down 4.7 percent to 16.2 and the May are down 5 percent 19.2. As a result, the VXX needs to constantly sell the cheaper future and buy more expensive contracts. That's why it keeps dropping.
The fund declined 6.07 percent to $16.25 in early afternoon trading today. It's been trending lower from resistance at $50 over the last four months and is now at all time lows. In addition to the contango factor, it's also lost value because the VIX itself has fallen as investor sentiment toward equities improve.
Options volume in VXX has soared in the last year, and today is triple the 120,000 average amount. Puts also outnumber calls by almost 2 to 1. That's an interesting contrast with the VIX, which normally sees more calls, and shows the kinds of headwinds this fund is expected to keep facing.