Tuesday, October 06, 2009

VIX / VXX Pairs Advantage

This is a continuation of Monday's VIXology showing some of the nuances of VIX versus VXX when run against the same pairs basket. As mentioned yesterday, Bill Luby explains the differences between the VIX and VXX, but the important thing to keep in mind in that VIX is a statistical value, not a price . . . whereas VXX reflects the price of the VXX exchange traded notes of the VIX futures.
VIX can be traded using options, VXX has no options. VXX trades about 1.5M shares daily with a nickel spread . . VIX options reflect high open interest and robust daily volume.
This is just a teaser to illustrate the differential between the VIX and VXX against a fixed pair basket. The VIX pairs display a positive edge, both in correlation linearity and P&L, but keep in mind you can't actual trade the VIX at the indicated values.
Some of my more resourceful option savvy readers may find merit in these VIX pairs using ATM options, especially on 4-7 day cycle trades when premium decay may not negate potential capital gains.
For my own purposes my intent here is to use the VIX long/short signals as confirmation for otherwise indicated momentum moves.
More on this theme next week . . . . .

1 comment:

jgpietsch said...

Hi BZB, have you looked at ^VXN as another alternative contra part? Best, Jeff