Long volatility ETPs tend to be a running joke among traders and a bane for long term holders.
But over the past few weeks the VXX has seen a 30% rally and doesn't seem to be having "headwinds" like usual.
So what gives?
The answer lies in the current VX futures market:
Here are some quotes from the CBOE Futures Exchange:
The VXX is a short term volatility product. It uses near term VX futures to gain exposure in the market.
VXX managers also must "roll" their exposure to another month before the contract expires.
When we have a normal market, longer dated VX futures have a higher price than near term futures. That causes the price of VXX to significantly lag.
But right now, there is a lot of near term perceived risk in the market. This causes a demand for short term hedging, which then leads to a rise in near term vol futures.
This is the only time where VXX shines. It doesn't perform but for 3 times a year... and when it works, it really works.
The trouble that VXX holders have now is that if the perceived risk drops and the volatility market normalizes, we will see a good drop in the VXX, both from the drop in price as well as the term structure in the market.