An interesting article on shorting the VIX and VIX derivatives: http://www.marketwatch.com/story/bew...ick-2015-09-11
In a nutshell, backwardation occurs (which only applies to VIX derivatives, not to the VIX itself) and this can "derail" a short VIX derivative play that is not given enough time to play out and for contango to kick in and start its inevitable erosion of the underlying, whether it be VXX, UVXY, XIV (inverse), or SVXY (inverse).
And although this only shows contango/backwardation for the years 2007-2012, one theme is evident and that is that the market is in contango the vast majority of the time (on average, >75% of the time): http://www.cboeoptionshub.com/2012/1...2-11-25-10-04/
In essence, then, the caveat to shorting VIX derivatives in reliance on contango being a constant on top of VIX mean reversion really should be a caveat against shorting and assuming that it will work out "immediately" or even "fairly quickly" (relative terms, I know).
The practical crux of this is that if you short VXX during a VIX >20 spike with, for example, a short call vertical, and it doesn't break your short call as you approach expiry, well, roll it out and give it more time to work out. After all, history says that for >75% of the time, contango will be on your side, even if you have to wait a little longer than you'd like for it to have the desired effect ... .
In a nutshell, backwardation occurs (which only applies to VIX derivatives, not to the VIX itself) and this can "derail" a short VIX derivative play that is not given enough time to play out and for contango to kick in and start its inevitable erosion of the underlying, whether it be VXX, UVXY, XIV (inverse), or SVXY (inverse).
And although this only shows contango/backwardation for the years 2007-2012, one theme is evident and that is that the market is in contango the vast majority of the time (on average, >75% of the time): http://www.cboeoptionshub.com/2012/1...2-11-25-10-04/
In essence, then, the caveat to shorting VIX derivatives in reliance on contango being a constant on top of VIX mean reversion really should be a caveat against shorting and assuming that it will work out "immediately" or even "fairly quickly" (relative terms, I know).
The practical crux of this is that if you short VXX during a VIX >20 spike with, for example, a short call vertical, and it doesn't break your short call as you approach expiry, well, roll it out and give it more time to work out. After all, history says that for >75% of the time, contango will be on your side, even if you have to wait a little longer than you'd like for it to have the desired effect ... .
Fireworks are fun ... as long as you don't blow your fingers off.
