Unless you pulled a Rip Van Winkle and missed the last few months of trading, you're probably well aware that market volatility has picked up recently.
The VIX, which seemed to be in a holding pattern in the low teens for much of 2017, finally broke out in late 2018 and climbed as high as 36. For volatility traders, it probably felt like Christmas came twice this past year.
Given all the recent movement, it's also likely that traders have been reaching deeper into their bag of volatility tricks in order to take advantage of new opportunities. The VXX, which tracks market volatility much like the VIX, may have been one of the products traders utilized during the last quarter of 2018.
Whether you've traded the VXX lately or not, it's important to understand that this underlying will cease trading at the end of January 2019.
As of the 30th of January, the VXX will essentially be replaced by the VXXB. The VXXB is already live and accessible, but volume has been light - arguably because the bulk of VXX participants haven't yet transitioned to the VXXB.
ETNs like VXX are designed to expire 20 to 30 years after inception, and January 30th, 2019 just happens to be the predetermined point in time that VXX is scheduled to close.
If you have existing positions in the VXX, or are considering deploying one prior to January 30th, then a recent episode of Options Jive is well worth a few moments of your time. The show provides further details on the last few weeks of trading in the VXX, and things traders may want to consider if/when transitioning to the VXXB.
As a reminder, the VXX is almost like a first-cousin to the VIX, and not just because it’s another widely followed gauge of market volatility. The VXX ETN is designed to replicate the return of the VIX.
The method by which the VXX attempts to replicate the VIX is by holding short-term VIX futures. The one complication with this approach is that futures expire, which means fund administrators of the VXX are routinely forced to sell front-month VIX futures in favor of buying second-month VIX futures.
In a previous blog post, we outlined why the technical design of the VXX can produce a "drag" on its value, as compared to the VIX. If you want to learn more about that concept, we recommend reviewing that piece when your schedule allows.
Getting back to Options Jive, the hosts highlight and discuss the three main choices available to traders with existing VXX positions prior to January 30th:
Close your positions in VXX using the open market prior to January 30th
Hold through expiration, and redeem your shares of VXX for new shares of VXXB
Hold through expiration, and redeem your shares of VXX for their cash value
In addition to covering the pros and cons of the above choices, the Options Jive team also discusses how traders can utilize VIX or UVXY options as a proxy for VXX/VXXB until after the switchover is complete.
We hope you’ll take the time to review the complete episode of Options Jive focusing on the VXX/VXXB when your schedule allows.
If you have any questions about trading these volatility products, or any others, don’t hesitate to leave a message in the space below, or reach out directly via Twitter (@tastytrade) or email (email@example.com).
We appreciate any and all questions/feedback, and look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.