VXX as a Long-Volatility Hedge and ETN
Summary
The document explains why investors may hold VXX despite the ongoing value decay commonly associated with contango in VIX futures. It presents two uses: a short-term directional view on volatility, or a hedge for portfolios and trading strategies that are vulnerable to sharp market moves. In the hedge role, gains during volatility spikes may offset losses elsewhere, while the position’s day-to-day decay acts like a cost of protection.
It also addresses the ETN’s lifecycle. The answer says the issuer can redeem the notes if their capital becomes very low and may reissue them, while suggesting the ticker could be retained. The discussion is conceptual and does not quantify hedge effectiveness, explain the precise redemption terms, or establish how the product behaves across market regimes. Its description of issuer actions is presented as a possibility rather than a guaranteed process.
Key ideas
- VXX can serve as a short-term directional position on volatility.
- Investors may hold VXX to hedge equity portfolios or short-volatility strategies against sharp moves.
- The cost of the hedge includes value decay during uneventful periods.
- The issuer may redeem and reissue notes if capital becomes very low.
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Full text
# How to make sense of VXX and the people who bought it? # How to make sense of VXX and the people who bought it? I don't quite understand how anyone would invest in VXX (asides from short-term trades)... Since the VIX term structure is generally in contango, the VXX is doomed to bleed to death. Therefore, how exactly does this type of structure work (ETN)? Eventually, the capital raised by selling these notes will run out - what happens then? They have already reverse splitted the VXX, what's next? Who is investing in it in the first place? ## Answer by Brian B (score 6, accepted) https://quant.stackexchange.com/a/307 Generally, one holds VXX (or VXZ) for the same reasons one holds any long-volatility position, either (a) as a directional bet on volatility or (b) as a hedge to large directional moves or implicit short volatility positions. Obviously the former reason is often shorter-term. In the second case, it's relatively easy to see that, say, an equity portfolio of leveraged companies will get creamed in precisely the same circumstances that VXX will spike. In effect, the dividends or appreciation of those stocks will pay for the bleeding of the VXX position. The same is even more evidently true of positions belonging to the subset of options traders whose personal style often puts them in short volatility (short gamma) positions. In these cases VXX provides something of a fire-and-forget hedge that does not need constant rolls, as an option or VIX futures position might. Essentially all long-volatility positions tend to "bleed" value from day to day, at least on those days when nothing "interesting" happens. Options traders call this the theta bill. With respect to the mechanics, Barclay's has the right to redeem the notes. The capital won't run all the way out, but may get so low that they decide to redeem and reissue. I would be willing to bet that, if they do so, they will work out a way to keep the stock symbol unaltered.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.