Ok now it’s time for a full post-mortem on this trade.
This trade is a short volatility trade the day before the market crashed.
The VXX is an instrument that performs well under certain conditions:
1. Non-reverting volatility to the downside in SPX
2. VX Futures backwardation.
This may seem cliche, but it holds true– this time really was different. The continued institutional interest in volatility positions led to a massive move in implied volatility… incredible sensitivity. We saw the highest reading *ever* in VVIX, which is the volatility index for VIX options.
And because so many now know about how volatility ETP’s work, there were too many people in similar positions that helped to keep VX futures in backwardation for very long.
With 20/20 hindsight here:
1. Had we deployed the trade a day later, it would have been an absolute homerun trade.
2. Had we used higher priced strikes, it would have been an absolute homerun trade.
3. If I had rolled the trade further out in time, the trade would be in a really good spot.
As to point 3– I chose not to roll because I’m not going to commit additional risk to a losing trade that wasn’t planned beforehand. Sure I may have ended up working the trade back to breakeven but it wasn’t something I was comfortable with.
Solutions going forward.
1. For any short VXX trades using this calendar strategy, I will still use my original signalling technique but will run it on a “lag” of 1 to 2 days.
2. Much more attention will be given to the VX1-VX2 spread.
3. If there’s a choice between a 30/60 and a 60/90 calendar, preference will be given to the latter.