This post was just published on ZYX Buy Change Alert.
Our models expect higher volatility going ahead. The down draft in the market today is an indication of what may come. The best way to protect against volatility is to buy volatility. This is the reason for a long position in VXX. If there is a quick 10% correction in the market, VIX may double.
Having said the foregoing, over the last 10 days, some large traders have been heavy sellers of volatility. So far they have been right. However it is important to note that the volatility is already near an all time low. In our view, heavily selling volatility near the lows is no different than picking up pennies on a rail road track right in front of a fast moving train. Such speculators may be successful in the short-term, but sooner or later they will be run over by the train.
We are not concerned about the speculators who have been heavily selling VIXs because they will get burned sooner or later and the selling will abate. Our concern is the term structure of VIX futures shown on the above chart. Futures become expensive as time goes on. What this means is that VXX ETF has to constantly sell current month futures and buy more expensive next month futures. In other words, if the market does nothing, VXX loses value on a continuous basis.
There you have it, the decision to hold VXX or get out of it comes down to the term structure of VIX on one hand and expectations of higher volatility on the other hand.
On balance, at this time, for investors who can withstand the risk of further loss on VXX, it does make sense to keep on holding VXX.
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