How to short VXX—the hard way and the easy way


Sunday, November 4th, 2012 | Vance Harwood

Easy way:

If you want to short VXX the simplest way is to buy XIV, VelocityShares’s Daily inverse VIX Short-term ETN.   This fund attempts to track the inverse of the daily percentage moves of VXX so it isn’t a true short, but it has the same goal—going up when VXX goes down.     It carries a 1.35% annual investment fee (assessed at the rate of 0.021% per day), which I doubt is an issue for you if you’re thinking of  shorting VXX.   Buying XIV does not require you have a margin account (which is required to short any securities), so you can make this trade in ordinary cash accounts or IRAs.  For more on XIV see here.

Barclays’ XXV and IVOP  are not a good solutions for shorting the VXX.  They are effectively a short of a VXX position, but one that has already delivered most of the available profit.  IVOP and XXV’s upside from now on is severely limited.  See this post for more information.

Hard way:

If you want to sell VXX short directly you need at least three things:  a broker that has shares of VXX available to short, a margin account, and assets (cash, securities) that you can deposit in your margin account.

Availability to short might be a common problem—I know it is with my Schwab account.  In spite of VXX’s high volumes, which average in the 20 million per day range, Schwab almost always shows VXX as “HTB”—Hard To Borrow.  The fine print on Schwab’s HTB suggests that if you want to pay some extra money they might be able to obtain some stock to short, but I have never pursued that course.  The Short Squeeze.com site shows VXX currently at 20 million shares short (~50% of the 43 million shares outstanding) which suggests VXX shouldn’t be all that hard to borrow.  SPY for example currently has a short interest of 197 million shares short (25% of the 764 million outstanding) and is always available to short at Schwab.  My guess is that a little shopping around would yield a broker that would be happy to facilitate your short sale.

In a regular cash account setting up a margin account usually just involves a small amount of paperwork.  You typically don’t incur any additional fees or interest unless you create margin debt (e.g., borrow money to buy some stock).     If you are shorting a stock or an ETN the initial transaction deposits money into your margin account.   You’ve sold a security; the fact that you didn’t own it in the first place is just a detail.  However you don’t earn (or pay)  interest on that money, and if the security goes ex-dividend while you are still short on it, you are on the hook for the dividend.

Any margin account will require some assets be present in the account to serve as margin.  The initial amount of margin you need to put up for a short sale varies with the security, so you will need to investigate further, but if it is 50%, a typical number, you will need to have assets worth at least 50% of your initial short sale deposited in your margin account before you can do the sale.    If your trade goes significantly against you and your asset to short position ratio drops below a certain threshold—typically 30%, you will get a margin call.   At this point you will either need to put up more assets or liquidate enough of your position to bring your asset to debt value back into line.  This is not fun.

If you want to sell short in an IRA you are out of luck with a mainstream broker.   All major stockbrokers that I am aware of do not allow margin accounts in IRAs, and you need a margin account to sell short.   It’s not that they are being unreasonable.  Since IRAs have major restrictions on how much can be contributed in a year it is hard to imagine how something like a margin call could be accommodated.

If you are interested in other ways of going short on the VIX index this post has more information.

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Sunday, November 4th, 2012 | Vance Harwood