Signal du Jour - short vol in VXX

Something to be thankful for.

We didn’t trade NVDA, nor did we wait to see the results in real time. Judging by the muted reaction this morning, earnings riders seem to have managed to capture a decent chunk of premium—nice disposable income just ahead of Black Friday and Thanksgiving.

Outside of NVDA, the market has been a whirlwind of activity this week. The Ukraine vs. Russia conflict has taken center stage in the headlines, replacing Israel vs. Iran, and has prompted waves of sell-offs and buybacks in US equities.

Once again, we hope that no cataclysm or geopolitical blunder disrupts what seems to be a well-choreographed show. After all, Trump’s return to office is now just 60 days away… right?

But let’s refocus on today’s topic. With all this renewed activity, the VIX has swung significantly, and its volatility has naturally risen, which is something to be thankful for: today, we’ll take a closer look at a potential trade-in VXX. Let’s dive in.

The context

Volatility got crushed candy-style immediately following the results of the US election. And while markets failed to sustain their highest levels of the year, volatility returned from its lows to trade within the cruising range of 16 to 18. Why cruising? If you're accustomed to the market, you know that the long-term average for the VIX hovers around 19. These levels are neither historically high nor excessively low—just enough wind in the sails for selling volatility strategies.

VXX, while not exactly the VIX itself, is a product designed to replicate the daily performance of the VIX futures index. It followed a similar trajectory: an initial drop from 55 to 45. Still, it stayed steady, quite different from its natural tendency to decline, making it a very popular product in retail volatility traders.

The reason is straightforward: VIX-based ETPs like VXX tend to lose value when the VIX futures term structure is in a strong contango. That hasn’t happened lately, allowing VXX to retain more value than usual.

The other notable aspect is the realized volatility in VXX.

The realized volatility in VIX-related products has been on the rise since the result of the election.

Realized volatility in VXX has been on the rise since the escalation of tensions between Russia and Ukraine following the U.S. authorizing the use of American weapons against Russian forces. Despite this increase, current levels remain far below the highs observed when the VIX hit 65 over the summer. They also fall short of the peaks reached in April last year when tensions between Israel and Iran pushed realized volatility to 60.