The worst and potentially best trade I have ever seen

On January 30, 2009 the VXX began trading. Since this time the VXX is down an astounding 99.65% (it could be even more but my calculator had trouble rounding an investment down so much.) Even though this investment has lost almost 100%, many new unsuspecting victims are drawn to the gravitational pull of this horrible investment. Why?

Many investors lose sleep over staying invested in stocks and losing their retirement savings. One day back in 2008, a marketing guy at Barclays got the idea that one way to hedge a portfolio was to buy volatility. The idea goes like this: bad news + volatility = stock losses. If we financially engineer a product that tracks volatility, investors will have an instrument that hedges losses in their portfolio. Please note that this product began trading in 2009, immediately after the credit crisis.

You want to own this ETF when the financial world is going to collapse. Adjusting for reverse stock splits, Yahoo Finance shows how VXX went from $7,000 to around $17.50. The average daily volume over a 3 month period is still 39 million shares! Yes, investors are still buying this thing. Investors who bought and held this speculative “investment” are down 40% from the beginning of the year.

I would consider this ETF as the panic button. If Greece collapses or a terrorist attack or stock market meltdown, this ETF has the potential to go up 100% overnight. But the wealth that has been lost is truly staggering. Where has this money gone?

I believe that some smart MIT guy have figured out a way to continuously bet against this ETF and make a fortune. In 2012, a few MIT students figured out how to make winning the Massachusetts lottery a sure bet. They won close to $8 million. I wouldn’t be surprised if someone has made $100’s millions on this ETF.

According to investorplace in 2012, “Like most commodity price curves, the VIX curve increases as the maturity date becomes more distant — a condition known as “contango.” For VXX, this has represented a serious problem because the fund continuously rolls the first-month contract to the second-month contract as each month progresses. The result: The fund, by its mandate, is forced to sell low and buy high in perpetuity.”

This VXX is an exchange-traded fund (ETF) from Barclays that supposedly tracks the Volatility Index (VIX) futures. This index is the S&P 500 VIX Short-Term Futures Index Total Return which is a strategy index that maintains positions in the front two-month CBOE Volatility Index (VIX) futures contracts.

This ETF is cursed by roll risk or time decay. Every two months this product will roll into another contract and loss money. Over the long run this product (and others similar) are all going to zero.

As policy, I normally do not discuss trade ideas and do not recommend shorting or even buying this security. I’m just informing you that there will be a story one day on 60 Minutes about a few guys that bought an island from shorting this ETF.

This is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security.

The material on this site represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

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