As many of you might know, VXX is an ETN issued by Barclays that gives exposures to the daily return of a combination of front and second month VIX futures. This has always been our contract of choice when trading the low risk option trading strategy we presented on this website.
To read more about this strategy, including various adjustment ideas to manage the position and improve the risk/reward profile, please read the document we published at the links below.
Last March Barclays has announced the indefinite suspension of any further sales from inventory and any further issuances of this note. But does it mean we cannot follow our trading strategy anymore? Luckily not!
As you can see in our articles, we always mentioned VXX together with VIXY. This is because, apart from some minor differences, these contracts behave the same way. Or, at least, they did until Barclays’ announcement last March. Since then, the VXX has traded at a premium and has not followed the dynamics of the underlying portfolio of VIX futures it is supposed to track.
The following chart shows clearly this decoupling.
In the past few months we have suggested the subscribers who are following our “VXX option trading strategy” to continue doing so by simply replacing VXX with VIXY. The latter is the natural alternative to VXX and hence allows us to exploit all the characteristics of VIX futures contango we want to leverage in our trading strategy.