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September 2, 2010  Thu 12:21 PM CT

VXX: SEE CHART GET CHAIN FIND STRATEGIES

The VXX Short Term VIX futures ETN has dropped to the lowest level since April, even though the volatility index it tracks is little changed in the last four weeks.

VXXThe VXX trades at $20.23, down another 1.94 percent on the day. It has fallen 16 percent in the last seven sessions, and 44 percent from its late-May high. It is now below the level from the May 6 “flash crash”, but that hides the true level of volatility.

The VIX is down 1.21 percent to 23.60, near its lowest reading since Aug. 10. It would have to fall below 18 to return to the same April range VXX. Furthermore, the VIX is simply the 30-day projection of volatility. VIX futures, which are a snapshot of where traders think the VIX will be in the future, are even higher. The September futures trade at 25.35, with October at 29.3 and November and December both above 30.

The VXX is a constantly rolling combination of the front two month futures. Given the upward sloping term structure on VIX, it consistently sells a cheap first first month to buy a more expensive second month, from one expiration to the next -- an expensive proposition. So the lower VXX really doesn’t speak to any sort of “complacency”. Actually the opposite is true to some degree because it means fear is still elevated in the longer term.

Finally, those who were excited about the rollout of the XXV Inverse VIX Short-Term Futures ETN as a way to get short the VXX may be a bit disappointed. I haven’t done a thorough analysis yet, but it certainly appears that a simple short position in VXX outperforms owning XXV position by quite a bit. That may be the reason we have seen a big synthetic short position go off in the VXX options out in January of 2012.

(Chart courtesy of tradeMONSTER)

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