Volatility-products + prayer

Markets continue at a high level, volatility falls and their associated ETF products drop to new record lows.  As tempting as it is to avail oneself ever of such products, either for hedging or for large gains, the probability of making any ​gain through them is very low (we demonstrate in an article linked below that it comes to ~5% with skill.)​  This article here is also the 3rd installment of a "Volatility-product(s)" series, and below we focus on the meaning of these new high and low records.  The prior two articles in the series were on failed strategies even with god-like clairvoyance, and on chance math on the typical performance.

First, let's explore the various records that have occurred using the VXX over most of its history.  In the past ~3.5 years (890 days), there have been 163 250-day lows (~weekly), but only 0 250-day highs.  One year of course is ~250 trading days, and so there has ​​never been such a duration when one could have profitably bought and held this product​ (not even if we stretched back the VXX data for a 2 remaining two additional years.)​  Even if we instead convert to semi-annual periods, there still has been zero 125-day highs (so 0% of the 890 days).  This avows how rapidly the product collapses, that no eventual spike has ever became a 6-month high.

We also notice in the latter, of the 2 articles above, that only 10% of any 125-day periods in recent years have resulted in a VXX gain.  Therefore it only makes some directional sense that virtually none of these 10% would be both a gain, and a 125-day high, simultaneously.

One might state that part of the reason for this downward bias in records is that, during the past ~3.5 years, volatility has come down.  And this explanation is indeed part true, though most would not have predicted that case (else they and others would have deliriously been buying stocks on margin well in advance of late 2011).  The XIV, the VXX inverse, has had 86 250-day highs (~10% of the 890 days).  But the VIX, which VXX better follows, has had 3 250-day highs, and only 15 250-day lows.  

for 890, 250d/1y periods	VXX	XIV	VIX
​Record highs	0	86	3
​Record lows	163	3	15
Neither	727	801	872

We show then that the VIX is a much better balance (though one can't own it) than VXX, which again has 0 250-day highs, and 11 times as many 250-day lows!  In just the past 1 year (as opposed to the broader 890-day history we described above) things are more difficult for owners of any volatility products.  To demonstrate, among the VIX, VXX, and XIV, and during the past 250 days (~1 year), there have only been 45 250-day records.  That amounts to only 6% of 750 overlapping days among the 3 products (250*3).  And of those 45 250-day records, 36 of them (or 80%) have been just the VXX making new 250-day lows!  So these have always been baleful speculation vehicles, across any horizon.

The temptation still often lingers to either hedge or seek large returns, through the use of these volatility products.  Perhaps some readers of this article will next time think more carefully about them next time (and their many new-age related products).  Even still, despite all the caution out there, a few will still make a run for it.  And a very small number will make something successful of it (again ~5% are profitable with skill).  For all of us though, the gravitational weight of a continuously decaying product assaults both your intellect and your portfolio (someone's going to earn a lot of easy money from you taking on these high tech portfolio-hatcheting products and it's not you!)​  Part of the VXX's charm at present is that you are taken in by what seems to be a "rare" record low buying opportunity.  This is a mathematical ignis fatuus however because of how enfeebling these products perform, you will always (nearly weekly) see a much lower record low buying price.  And far fewer record high opportunities to sell!

Auxiliary note, we've had several of our blog research nicely cited in outstanding places.  Abnormal risks was shared by a Board member of Lending Club (an exclusive board including Larry Summers, John Mack, and Mary Meeker)  Additionally, Zero Hedge has shared two of these articles: Volatility-product proselytizers, and Fine, if you ignore history.  The former research, also referred to in this article, has recently been kindly acknowledged in a number of places such as Yahoo!, Stock Twits, and Seeking Alpha.

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