I'm going to attempt to keep this question short instead of providing some rambling, and very likely, wrong explanation of the question.

As far as I can tell from my novice research the VXX note is by definition expected to always lose value over time. Reviewing its history, it has indeed lost ~99% in the long run. That begs the question from me, why isn't 'everyone' short VXX?

The two simple explanations I see are. First, the example of the other VIX based ETF/Ns that imploded during the last major spike of the VIX, that is, the entire fund could simple 'go bankrupt' (I'm not sure of the technical term of what happened). Second, the interest rate of the borrowed shares from brokerages to actually sell short may greatly outweigh the potential profit.

Are these the reasons, or is there something more complex about it?

  • " by definition expected to always lose value over time" Where do you see this? VXX is up 11% today and up 50% for the week - does that sound like something you wanted to be short in?
    – D Stanley
    Feb 28 '20 at 15:36
  • 1
    @DStanley: look at any longer time period
    – Ben Voigt
    Feb 28 '20 at 17:19
  • @BenVoigt you are correct that it tends downward over time. But that is fairly slow, and not worth the risk of events like this week.
    – IVcrush
    Feb 29 '20 at 2:03
  • That said, if you catch it on the way down after a big spike, that can be a good opportunity to sell calls or maybe short the stock.
    – IVcrush
    Feb 29 '20 at 2:14

Here's a PSA, and a short answer.

PSA: Please don't trade things that you don't understand. That's rule #1. Not that you're doing that. You're trying to educate yourself, I can see that clearly. This is directed at anyone else that comes across this post.

Short Answer: Think of buying VXX like buying insurance on the stock market. Like other forms of insurance, it loses money over the long run if you're the one buying it and makes you money over the long run if you're the one selling it, but... Sometimes bad things happen, and then insurance payouts happen, and as a result sometimes insurance companies go broke.

If you're dead set on trading it, first checkout the CBOE site for VIX futures and then the prospectus. If you can't make sense of that stuff, well, see the PSA.

Adding in response to OP's comment: My answer wasn't meant to come across that way. It was meant to be a warning. The group of VIX-based ETFs and ETNs are some of the most complicated financial products that exist (which individual investors can easily trade).

You asked how/why a speculative financial instrument even exists if its value is predetermined? At first you might roll your eyes at this one, but this is important: it's value is not predetermined. Saying that over some unspecified period of time something should trend towards 0 is very different than knowing on any one date exactly what that thing will be worth. Why? Path dependency. The path matters. If a seer told you that you would die a rich man that may please you. If the seer then told you that you would be poor until the week before you died and then get rich very quickly, well, you may not like that as much. And what if the seer said that all of this would happen over the next month? Then you're really not happy!

To tie this back into your specific question:
- If you short VXX, depending on how much you short, you yourself can go bankrupt depending on how much of it you short and how much it goes up. I'm not aware of an actual limit on how high VXX can go (if there is one i'd be interested to hear that). - A big thing to consider is the utility(think of this like the value to you) of the cashflows from your trade in different states of the world. If there's a trade where you make money when the world overall is a happier place and you lose money when the world overall is a scarier place, that is going to be looked at differently than the opposite, assuming the probabilities and dollar amounts are similar. This can be tricky to grasp for some but let's say there's a 50% probability the economy is chugging along just fine a year from now and a 50% probability we're in a recession. If I told you that you could either choose (A) to receive +$10k in the event the economy is fine and lose $10k in the event it's not, or (B) lose $10k in the event the economy is fine and receive $10k in a recession, which would you choose if you had to choose one? You should choose (B). Why? Well, it's much harder for you to get $10k if we're in a recession and you're more likely to be losing money elsewhere and we humans generally like to not end up in the street and/or hungry-- we want to smooth out our wealth over time, we dislike volatility. That $10k when things are going badly is worth more to you.

Do all of those points make sense? And yes, this is pretty complex.

To wrap it all up if you agree with the above: Since VXX does tend to go down over time, it does tend to go up when the market goes down (and most people own the market and things like the market), and because cross-asset correlations have been generally trending higher over time (so it's "harder" to diversify than in the past), it may make sense for someone that understands exactly what they're doing to short some amount of it(or do some similar trade) in the context of a broader portfolio, but probably not as much of it as they would have been short in years past.

  • It certainly wasn't meant to come across that way. It was a warning, not a disclaimer. I'll expound... - The group of VIX-based ETFs and ETNs are some of the most complicated financial products that exist (which individual investors can easily trade). Mar 3 '20 at 20:09

why isn't 'everyone' short VXX?

Shorts can be forcibly closed by the lender under certain conditions. Given this, then if VXX spikes upwards, you could get wrecked. So even if you are 100% sure that the price will drop eventually, there is still short-term risk.

Additionally, there is only so much liquidity in the market for any action. As you reach this limit, liquidity will drop and/or the price will fluctuate drastically to reach equilibrium. If 'everyone' tried to short VXX, then not everyone would be able to.

Finally, there is always the true opposition to any given investment, opportunity cost. Shorts against VXX may very well make guaranteed money eventually, but does shorting VXX make more profit than the alternatives would? Not for 'everyone' Even if the interest rate of the borrowed shares doesn't exceed the cost (net profit), your opportunity cost could still make it a negative action for you.

The perception that VXX has very little long-term risk of failure for shorting doesn't mean it's the best decision.



Over time, "everyone" will not make money by shorting VXX.

Shorting requires holding an account balance (margin requirement) roughly equal to the short position size. The precise amount can be higher or lower, but what happens next is the same:

If the value of your shorted VXX shares happens to move up higher than the available balance, you will need to either liquidate other positions or deposit additional funds into the account. If you don't come up with funds, the broker will close your VXX short at a loss to you. The fact that VXX will move down later after your position has been closed is of little consolation: you were right, but still lost money.


There are VXX strategies using options that allow you to profit from the likely VIX fall while capping your risk. A simple one is merely to buy puts on VXX - you may easily lose your entire investment, but no more, and your potential gain can be multiples of that investment. Options strategies can get complex, and this trade may not be a good way to learn about options trading if you are not familiar.

Why does VXX keep going down? Who are the suckers who keep buying it? The answer lies with modern portfolio theory which focuses on overall portfolio risk and reward. VXX has an extremely low beta, usually in the neighborhood of negative 5. You can buy VXX and add to your portfolio to lower your portfolio beta to support either other higher beta stocks (you can think of these as higher risk/reward investments although technically not a perfect definition), or you can support more portfolio leverage. A little VXX can cut portfolio risk much more than cash. Is this a good portfolio strategy given VXX losses? Probably not an ace in the hole, but conceivably some managers may use a longer term holding to their overall advantage. Of course shorter term VXX buying in anticipation of market risk occurs.

That brings us to the big downside of shorting/derivative equivalents. When the market tanks, not only have you lost a lot of money in your regular stock portfolio, most likely your VXX investment has collapsed, and if you have an uncovered short position, you may be in deep trouble. As others have mentioned, read the prospectus and the terms of shorting.

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