Why VXX is Such a Killer (Five-Months View of VIX Futures Data)

I thought it might be helpful to some readers to see a snippet of the vast amounts of data I track and analyze in my pursuit of developing the strongest possible volatility trading system I can build. Therefore, I've added a VIX Futures Data tab on my website which plots out the most recent 5 months of VIX and VIX Futures data in to an interactive chart (while I have data going back to 2004 in Excel, I'm not quite sure Google Docs can handle it).

Since the graph on the website uses flash, I've included a static image in this post so that it can be visible in your emails and RSS feed.

This graph shows the closing daily values of the spot VIX and the first 7 months over the course of the last five months. If you've never seen the VIX futures plotted out like this, allow me to point a few things out.

1) Contango, the condition in which contracts for near term months are less expensive than contracts further out in the future, is clearly visible at most points. On Nov 23rd, for example, Dec contracts are cheaper than Jan, which are cheaper than Feb, which are cheaper than March, and so on.

2) Last day of the roll period. The vertical lines in the middle of each month indicates a monthly contract has expired. At this point, all months advance forward one month (2nd month becomes the 1st month, 3rd becomes the 2nd, etc) and you can see a new 7th month added into the mix (towards the high side of the graph). Try following the purple line - where does it go? The constant rolling of VIX futures during contango, despite a mostly sideways spot VIX, is what causes VXX and UVXY to lose so much money (and inverse products such as XIV and ZIV to gain so much).

3) Compression.  We've come a long way in five months.  In late August 2012 it was hard for front month futures (light blue line) to get below 19.  Fast forward to today and you can see that seven months of futures are below 19 and have compressed to less than 5 points, something that hasnt happened since mid-2007. In other words, the market has priced in very little volatility between now and August 2013. Think about what the current level of compression says about the future price movement of XIV, VXX, and ZIV.

I'm hoping this graph will update dynamically but I'll have to wait until Monday to know for sure.  In the meantime, let me know what you think.

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