Opinions
Larry Berman CFA, CMT, CTA
iPath S&P 500 VIX Short-Term
VXX-T
COMMENT
Oct 26, 2020
Stock price when the opinion was issued
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Holds VIX futures. You have to understand the premium in the front month futures and the spot VIX. Very difficult tools to use. Typically when the market breaks an important level, it leads to some technical selling and usually you get a spike in the VIX. Don’t play it for more than a couple of days at a time.
It goes up when the market is volatile. It's an ETN, not ETF. Is a little credit risk, but offers exposure to the first two months of the VIX futures contract. It's your class disaster insurance, but all insurance has a cost. During Covid, this was up 300% in mere weeks. Gives huge returns over a short time. It's hard for retail investors to grapple. VXX is down 40% YTD. Can be very risky. Use a very small portion of this in a portfolio and actively manage it. During huge volatility, you will need to sell and rebalance to return to a small holding.
You have to define short-term. This is a vehicle that, in the long run, will lose you $$ if you hold it for more than a number of months. Because of the structure of the curve, this is constantly losing money. For example, if you put in $700 two years ago, today it would be worth $56.
Weeks to maybe a month (or a bit longer, but not much) is as long as you want to hold this. Which means that your market timing has to be really precise on when that correction's going to be. He's been on BNN for 25 years, and he's not good enough to make a call as to when a correction is likely to be.
This tool is never, ever a no-brainer.