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A Guide to Trading Volatility Using VXX ETNs and Options
What Is VXX?
The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) is a volatility-linked exchange-traded note (ETN) issued by Barclays. It provides exposure to a rolling portfolio of first- and second-month VIX futures contracts, allowing traders to speculate on or hedge against changes in implied volatility in the S&P 500.
VXX is not a stock, ETF, or index, and it doesn’t track the VIX directly. Instead, it tracks the daily percentage returns of the S&P 500 VIX Short-Term Futures Index Total Return, which reflects the returns of holding a rolling position in front-month and second-month VIX futures.
How Does VXX Work?
VXX holds a constantly rebalanced position in near-dated VIX futures contracts, typically allocating between the front (first) and second-month futures. This rebalancing occurs daily.
Here’s how it works:
When markets are calm, the VIX futures curve is typically in contango, meaning longer-dated contracts are more expensive than shorter-dated ones.
Because VXX must sell cheaper, expiring contracts and buy more expensive, further-out contracts daily, this results in negative roll yield, or drag.
Over time, this structure tends to erode the value of VXX in normal market conditions.
This is why VXX is not a buy-and-hold instrument. It’s generally used for short-term trades, hedging, or tactical plays on volatility spikes.
Long-Term VXX Price Behavior
Looking at a long-term chart of VXX may reveal a dramatic decline—often mistaken for price crashes. In reality, the product is designed to trend lower during periods of calm volatility, due to its negative roll mechanics in contango environments.
To maintain a tradeable share price, Barclays has executed multiple reverse splits on VXX since its launch in 2009. As of now, VXX has undergone eight reverse splits. These don’t change the total value of your holdings but reduce the number of shares while increasing the share price proportionally (e.g., a 1-for-4 reverse split turns 4 shares at $10 into 1 share at $40).
VXX vs. VIX: Key Differences
While VXX and VIX are related volatility products, they serve different purposes and behave differently:
What Is VXX and How Do You Trade It? 5
How Is the VXX Calculated?
VXX’s price is based on the market cap of the ETN divided by the number of shares outstanding, but the price movements are driven by:
The price changes in the first and second-month VIX futures.
The roll yield from daily rebalancing.
Market sentiment, particularly around uncertainty and risk.
Because it tracks futures, VXX doesn’t track the VIX index directly, and divergences in short-term movements are common.
Trading the VXX: What You Need to Know
VXX can be traded just like a stock through any standard brokerage account. You can also trade options on VXX, which offer both speculative and hedging opportunities.
How to Get Started:
Open a brokerage account that supports ETNs and options trading (if you plan to trade VXX options).
Understand the product mechanics—especially the impact of contango and roll yield.
Monitor the VIX futures term structure—tools like the VIX futures curve help traders anticipate VXX behavior.
Manage your trades actively, VXX is not designed to be held long-term.
Example Use Cases:
Bullish volatility play: Buy VXX shares or long calls when anticipating a volatility spike.
Hedging portfolio risk: Use VXX calls or shares as insurance during event-driven risk (e.g., earnings season, macro headlines).
Bearish volatility trade: Sell VXX call spreads or buy put spreads in calm market conditions to benefit from the natural price decay.
Why VXX Is a Short-Term Trading Product
Due to its structure and pricing model, VXX tends to decline steadily when volatility is low and futures are in contango. This is a feature, not a flaw.
In rare periods of backwardation—when near-term futures are priced higher than longer-dated ones—VXX can rally sharply, as seen during market crashes or major geopolitical events.
However, once the event passes and contango resumes, VXX typically resumes its downward drift.
VXX Options: What to Know
Options on VXX give traders more tools for positioning:
Calls allow speculation on rising volatility or hedging equity exposure.
Puts offer a way to trade expected volatility decay.
Spreads such as verticals or calendars are commonly used to structure defined-risk bets on volatility.
Key Characteristics:
VXX options are American-style and settle to VXX shares.
Standard contracts control 100 shares of VXX.
Implied volatility can be elevated during periods of market stress, inflating option premiums.
Traders sometimes use VXX as a hedge against a long equity portfolio. This makes sense because:
When markets fall sharply, volatility typically rises.
VXX tends to spike when VIX futures move into backwardation.
That said, timing is critical. Because VXX decays in normal conditions, holding it too long can erode its hedging power. Instead of passive holding, traders should view it as event-driven protection for short windows.
Similarly, bearish VXX trades (short VXX or long puts) may be used by those expecting continued market calm.
VXX is a volatility-linked ETN, not a stock or ETF.
It tracks the daily returns of near-term VIX futures, not the VIX itself.
Not suited for long-term investing due to daily decay from contango.
Offers liquid options for strategic hedging or speculation.
Can be used to hedge equity portfolios in short bursts.
Traders must understand term structure, roll mechanics, and option behavior to use it effectively.
Whether you’re hedging risk or trading volatility events, VXX is a powerful—but complex—tool. Mastering it requires not just chart-watching, but a strong grasp of how futures impact pricing and structure.
