The VIX ETN Short

Why they decay

An ETN mimics the VIX by holding options, and options expire. Contract roll: the fund continually replenishes expiring contracts, and every roll is decay, which guarantees the products decline over time and deteriorate even more than the VIX itself. VXX has declined roughly 60% per year on average since inception. The TVIX prospectus states it plainly: “the closing indicative value of your ETN is likely to be close to zero after 20 years”. The issuer’s own document says no investor should hold to maturity. The VIX itself is bounded: it can neither rise forever nor go to zero, and because its options expire, positions cannot be held long-term in the VIX itself, hence the ETNs.

These ETNs can rally violently during fear spikes, but the long-term direction is down. Direction of the market is not what kills them; contango is: in a normal market the front-month VIX option carries less premium than the back months, so every roll sells low and buys high.

The two rally conditions

The rallies are knowable. Long-VIX ETNs spike when:

Condition 1: FTFC down in the broader averages. The market falling on all timeframes means participants pay more for insurance. See full timeframe continuity.

Condition 2: backwardation. During fear, FTFC down plus known events (elections, FOMC; see event continuity), the term structure inverts and the front month becomes more expensive than the back months. Backwardation is the ETN rally fuel. Monitor vixcentral.com or cboe.com for the term structure, the VIX itself, upcoming known events, and FTFC in SPY.

Never short into an active spike while these conditions are in force: a vertical move can hand the short a 50% drawdown. Wait for the spike high to print, the ETN’s FTFC to flip back down, and contango to hold, then short the failed expansion.

How to trade them

Entry: only from the highs of broadening formations, never from the lows. These are not stocks, so do not cover at the bottom of a BF. Decay products are more likely to make new lower BFs than to bounce back to prior BF tops the way stocks do: a slight higher high, a reclaim, and price never comes back.

Cover/exit when:

• The two rally conditions appear (FTFC down + backwardation).
• The entry begins to go negative: no reason to take heat.
• The BF expands to the upside (outside bars going up).

If the triangle expands and takes the stop, get out, then re-enter when the triangle reclaims back down, because decay continues.

Related: Know Your ETFs · Full Timeframe Continuity · Price Discovery & Broadening Formations
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