The VXX ticker symbol looks like any other stock such as IBM or AAPL.
But it’s not like a stock. It doesn’t give you ownership in any corporation. There’s no quarterly earnings report or dividend distribution.
Instead, it’s an exchange traded note (ETN). ETNs are similar to ETFs, except they are debt instruments. But that’s just a technicality. The point is that does continuous trading around the volatility term structure.
It continually, buys the (higher) second month volatility and sells the (lower) front month volatility.It continually buys high and sells low — and therefore just keeps losing money and decays towards 0.
|TRADE DATE||Expiration Date||VIX||Contract Month|
|3/17/2017 3:14:58 PM||11.29||1|
|3/17/2017 3:14:58 PM||12.77||2|
|3/17/2017 3:14:58 PM||13.81||3|
|3/17/2017 3:14:58 PM||15.83||4|
|3/17/2017 3:14:58 PM||16.67||5|
|3/17/2017 3:14:58 PM||16.82||6|
|3/17/2017 3:14:58 PM||18.45||7|
|3/17/2017 3:14:58 PM||19.15||8|
|3/17/2017 3:14:58 PM||20.59||9|
Since we said above that the VXX is continually buying the second month VIX level and selling the front month VIX level, if the term structure is sloping upwards – then that means this VXX algorithm is always buying high and selling low.
Repeat: buying high and selling low
That’s NOT what you’re supposed to do to make money!
And that’s exactly what VXX does — it loses money almost all the time.
As long as the market is in a complacent state — and generally that means an upward sloping VIX term structure – most commonly referred to as “contango” — then the VXX will continually trend towards 0.