Can VXX ETF Recover to Its Original Value?

The VXX ETF, a popular trading vehicle for those seeking exposure to the VIX, a widely used indicator for market volatility, has faced significant challenges over the years. One of the most pressing questions in the minds of traders and analysts is whether VXX can recover to its original value. In this article, we will explore the factors contributing to VXX's decline, the likelihood of it recovering, and the implications of different market conditions.

Understanding VXX and VIX

The VXX ETF is designed to track the VIX index, a measure of future implied volatility of the SP 500 index options. The VIX, often referred to as the 'fear gauge,' indicates market fear and uncertainty. While VXX is intended to reflect the VIX, its performance is often affected by various market dynamics, including the concept of contango and backwardation in the VIX futures markets.

The Role of Contango in VXX Erosion

The primary reason for VXX's gradual decline is a phenomenon known as contango in VIX futures. Contango occurs when the nearest future contracts are lower in value than the next ones. This pricing structure is due to the cost of carrying costs, such as interest rates and storage expenses, which are typically valued at a premium for future contracts. Over time, contango can cause the VXX to slowly lose value as the ETF signals to sell short-term VIX futures and buy long-term ones, leading to a net loss.

However, the current situation as of February 9, 2018, is an exception due to market turmoil. The VIX futures are experiencing a condition known as backwardation, where short-term futures are more expensive than long-term ones. Backwardation can arise due to unexpected market events, such as geopolitical tensions or economic uncertainty, which typically push traders to demand current protection more urgently.

Can VXX Recover to Its Original Value?

Yes, it is theoretically possible for VXX to recover to its original value or even exceed it, especially if the current market conditions persist. This could happen if market sentiment improves and backwardation in VIX futures continues. However, the likelihood of this scenario is highly unlikely given the typical nature of the VIX futures market.

The question of whether VXX can recover to its original value is multifaceted. It hinges on the ability of the VIX futures market to remain in a state of backwardation, which is a rarity in the long term. Moreover, external market factors, including economic indicators, geopolitical events, and investor sentiment, can play a critical role. If these factors remain favorable for a prolonged period, the VXX might regain its original value or even surpass it. Conversely, if market conditions revert to a state of contango, the value of VXX is likely to continue its decline.

Implications of VXX Recovery

If VXX were to recover to its original value, it would be a significant event for both traders and investors. It would indicate a shift in market sentiment, which might have broader implications for the financial markets. For example, if market volatility decreases, it could signal a more stable economic environment, potentially encouraging investment in other financial instruments.

Additionally, a recovery of VXX would have direct implications for traders who use it as a proxy for market volatility. They would benefit from the increase in its value, which could lead to better trading opportunities. However, any such recovery would also highlight the importance of understanding market dynamics and the complexities of hedging strategies.

Conclusion

In conclusion, while it is possible for VXX ETF to recover to its original value, the likelihood of this occurring is low. The current state of backwardation in the VIX futures market, while interesting, is an anomaly and not a sustainable condition. Traders and investors should remain informed about the latest market conditions, understand the dynamics of VIX futures, and be prepared for potential fluctuations in VXX's performance.

To stay updated with the latest financial news and insights, follow reputable financial news sources and continue to monitor market trends. Understanding the complexities of the VIX and VXX can provide valuable insights into the broader financial markets and help in making more informed investment decisions.