By Noel Smith, Founder and Chief Investment Officer of Convex Asset Management.


Buying put options in VXX has a superior risk to reward profile compared to shorting VXX shares by limiting risk and providing positive vega exposure.

Profitable but Dangerous

Being short volatility has been one of the best trades in recent memory. The problem is that holding an outright short volatility trade can irreparably devastate a portfolio in the event of a market downturn. Therefore it is important to mitigate the tail risk of any short volatility position.

The upper graph shows the price of VXX in a regular scale. The lower graph shows the price of VXX on log scale.


Vehicle of Choice

The short volatility trade can be accomplished in many ways. Some popular examples:

  • Short options on SPY or SPX
  • Long inverse volatility ETPs like SVXY, or XIV (before it crashed -90\% in one day)
  • Short VXX
  • Long VXX put options

We argue that outright shorting of VXX is very dangerous and should never be done. Our preferred method of shorting volatility is by buying put options on VXX, either outright or as a spread (buy one put, sell another put of the same expiration at a lower strike).

Practical Example

Assume you want to short $1mm worth of VXX, at today’s price of $27.62. This means you will have to short about 36,000 shares. This can be risky due to the potential for sharp short-term price spikes in VXX during market downturns. Some of the potential risks during one of these spikes are: high borrow rates, margin requirement increases, and (worst of all) the potential to have your borrowed shares called in.

Alternatively, you could buy puts. For example, the October 16th, 2020 $28.00 puts can be purchased today for $5.00 each. Purchasing 360 of these puts would cost a total of $180,000. This trade would have roughly half the short dollar exposure compared to the short VXX shares trade. However, the long put trade would only have a maximum loss of $180,000 compared to the unlimited maximum loss of the short VXX shares trade.

Positive Vega

The less obvious aspect of this trade is what happens to the VXX puts if the stock market crashes. As VXX spikes up, the positive vega exposure from being long options kicks in as a built-in risk mitigation feature. Positive vega exposure simply means that increases in the volatility of VXX have a positive impact on the price of the VXX puts. And in contrast to stock indices, VXX volatility tends to be positively correlated to VXX price.

Put a different way, when the market crashes, VIX spikes up which causes the "VIX" of the VIX (see VVIX) to spike up. This translates to a spike in the volatility of VXX which buffers the decrease in the VXX put's price and lessens the trade's loss. This "long volatility of volatility" property makes the long VXX put trade more robust to short-term market turmoil.


Options can offer a risk-defined way of participating in otherwise risky trades with a known max loss at the time the trade is initiated. The long VXX put trade is a good example of how we can use options to construct profitable trades without putting the portfolio in major risk.

Podcast on Past, Present, and Future Volatility:…

About the Author:

Noel Smith is a Founding Partner and the Chief Investment Officer of Convex Asset Management, a private investment firm. As a member of the CME, CBOT and CBOE Noel has over 25 years of experience trading volatility, market making, and managing risk. Noel was previously the CIO and Portfolio Manager of two separate Chicago-based proprietary derivatives trading firms. Additionally, he was the seed investor who financed the launch of global high-frequency trading firm GETCO LLC (KCG/Virtu) which grew to account for 20%+ of trading volume in the U.S.   As a founding member of Third Millennium trading in 1996 his firm became one of the largest options market-making firms in US Equity Options Markets backing over 65 market makers and traders at the CBOE, CME and CBOT. Noel is an expert in options, stocks, bonds, ETPs, commodities, futures, and volatility. As a quantitative investor and risk manager, Noel is versed in high-frequency trading (HFT), relevant market structure, and the underlying technology.

Noel Smith

Original source:

Be advised that investments may go up as well as down for any reason, and past performance of a stock is no guarantee of future performance. These ideas are for educational purposes only and are not a recommendation or solicitation. C.A.M. or its employees make no representation as to the timeliness, accuracy or suitability of any content on this website, and cannot be held liable for any irregularity or inaccuracy.