It has been carnage in the long volatility ETP space this week (or pure delight being short these products or long inverse volatility ETPs) after the French election pollsters got it right and the VIX/futures immediate cratered to lows not seen since before the financial crisis. Here is a 5 day performance chart of a few major vol products:

But here is a scary thought- is it actually possible that you can be long these products and not expect to get killed? Maybe even make a few bucks on a down day? What a contrarian idea!

To answer that question, let’s examine what VXX is holding:

So with one week having gone by in the rolling cycle of VIX futures ETPs that hold the front month and roll into the second month, like VXX, it is approximately 1/4th June and 3/4ths May. So 75% of the performance of VXX is still tied to the May futures contract. The May and June contracts are currently priced 12.3 and 13.2 as we can see courtesy of @vixcentral.com:

One huge point to be aware of before we continue. Once about every 3-4 months the VIX rolling cycle, just like the options expiration cycle, experiences a 5 week roll. That is the case with June. June has 56 days to expiration.

So, let’s be realistic here for a moment. There just aren’t that many VIX settlements below 12. In fact, with all the record low realized volatility in the S&P 500 this year, the lowest settlement was 12.26 in February. In 2016, December expired in front of the major holidays at 11.15 and July settled at 11.62. So for the sake of this back-of-the-envelope math, 11 is really the lowest the VIX future can be expected to go. (Please don’t troll me if we print a 10.99 in May, anything is possible but you get the point here.)

If the front 2 months of VIX futures came off 10% tomorrow sending the May VIX future to 11.1 with 21 days to expiration, and June to 12 with 56 days to expiration, can we reasonably say that is about as far down as the futures can go in the short term (next 2-5 weeks)?

If you believe the rough math (don’t rely on my calculator, pull yours out), then VXX less 10% is $13.5 and UVXY at double that at -20% sends it to $12.10. That gives you something to shoot against. And the options know it too, the VXX May 19th $13.5 puts are a mere 7 cents!

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