It is worth noting that VIX closed at VXX has been trading for over days since debuting in The reason for this sort of price action relates to the relationship between VIX futures and the index. More often than not VIX futures are priced at a premium to the index and the second month is priced at a premium to the front month. As futures approach expiration the value of the futures contracts will gravitate to the index. For those unfamiliar with the term contango, with respect to VIX futures pricing versus VIX it refers to the pricing of futures moving progressively higher the farther the expiration date of the futures contracts.
This has a negative impact on VXX as the strategy VXX was created to follow will consistently sell front-month futures and buy second-month futures. This buying and selling of futures contracts is done to maintain a day weighting between the two. Often this means that cheaper futures are being sold and more expensive futures being purchased. Eventually the second month future becomes the front month and the strategy will sell those contracts and begin purchasing the farther month.
Often when selling commences the price of the future is lower than when it was purchased and the vast majority of the time the front month is being sold for less premium than is being paid for second month.
The VIX futures pricing is more often in contango than backwardation. So far in the front part of the curve has been in backwardation only five trading days out of at second quarter end and those instances have been very short lived.
In the VIX curve was in contango every day until late December when the Fiscal Cliff situation resulted in a spike in volatility and VIX going to a premium relative to the futures contracts for a day or two.
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