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


Updated: Jul 6th, 2017 | Vance Harwood | @6_Figure_Invest

Easy way:

If you want to short VXX the simplest way is to buy XIV or SVXY.  These Exchange Traded Funds 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.     They carry annual investment fees (XIV’s is 1.35%), which I doubt is an issue for you if you’re thinking of shorting VXX.   Buying these inverse funds 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..

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—IRS rules prohibit that.  Your only option is inverse Exchange Traded Products like XIV, SVYX, and  VMIN.

If you’d like more information, including risk assessment strategies, see “Is Shorting VXX the Perfect Trade“.

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

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Thursday, July 6th, 2017 | Vance Harwood
  • Anders

    At least back in 2011 you could go short in VXX using Interactive Brokers without any problems.

  • Wonwoo Roy Choi

    You can short VXX by doing a synthetic short position via options. Short call & long put of the same strike. You’re going to get screwed on the bid-ask spread, but think of that as a hard to borrow fee. At least you know exactly how much the “fee” you’ll have to pay without talking to your broker.

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  • Armando Phillips

    You can easily short from an IRA as long as you get it self directed and set up a LLC, thus open a brokerage under the LLC and thus short anything you want.

  • This post: http://jux.law/ira-llc-how-to-use-an-llc-for-a-self-directed-ira/ seems to think that is not a good idea.

  • hb7of9

    I have always found it easy to short VXX on IB. From a profit point of view, I agree that XIV is best because:

    1) It has no shorting fees
    2) It can only drop 80% to 90% in value
    3) VXX can easily spike 300% plus

    Seems to me that XIV is the better bet right?

    Because the drop percentage is limited, 80-100%, we can invest more, whereas for VXX I have to cut the short size, in-case the market spikes 300%.

  • George Connaughton

    Vance,
    Great article. Instead of shorting VXX, why not just short VIX futures? Is there an advantage to shorting the VXX vs opportunistically shorting the M1 or M2 contract when they spike? It also seems an easy way to avoid the issues around borrowing shares to short.

  • Hi George, Shorting VIX futures certainly is a viable alternative. You avoid the issues / carry costs of shorting, but you pick up some new issues, for example the future will expire, so you have to roll positions if you want to maintain it and your exposure to a volatility spike increases as the future approaches expiration–it starts tracking the moves of the VIX more closely.

  • Sunil Narayana

    Thank you for the great article. Can you please share your thoughts on shorting VXZ when compared to Shorting: Vxx. Thanks

  • Hi Sunil, Shorting VXZ is a lower risk, lower payoff trade. VXZ can still go up a lot in a big correction or bear market so it’s important to have an exit strategy, or option hedges on it to protect your position if things get bad.

  • Sunil Narayana

    Hello Vance, Thank you for the advice. Do you see it’s volumes to cause any issue.

  • Hi Sunil, VXZ’s liquidity should be good because the underlying is VIX futures. The spreads are tight. For info on trading lower volume ETFs see: https://sixfigureinvesting.com/2015/08/determining-liquidity-of-low-volume-etf-etn/

    https://sixfigureinvesting.com/2015/08/trading-low-volume-exchange-traded-products/

  • Sunil Narayana

    Hello Vance, Thank you for your advise. This is very helpful.

  • Federico

    Can buying puts on VXX be considered a short volatility play? Especially after a spike like the recent one on September 5?

    My concerns regarding buying puts on products such as VXX and UVXY on a VIX spike are choosing the days to expiration and the right strike price. I would exclude ATM strike because of the rich theta. I would definitely prefer buying them either OTM on ITM. Do you think my vision is wrong?

    Regards,

    Federico

  • Hi Federico, Yes, buying puts on VXX or UVXY is a short volatility play. This approach is one of the safest because you can only lose at most what you put in initially. There are no easy answers on strikes & expiration. Waiting for spikes is a good. Too short a time frame can be painful because just a little choppiness in the market can result in these products going sideways for months–like June –> September 2017

  • Sunil Narayana

    Thank you Vance for the insight. This is so true, that between mid of Feb to March this year, it was just around 10% sideways. Given so many scenairos, what is your advise in doing a trade on Vxx. I am thinking short Vxx and have a stop loss at 5-10% and also have a call at around 20% OTM with 2-4 week expiry. Can you please share your thoughts. Thank you as always.

  • Sunil Narayana

    Hello Vance, hope you’re doing well. Can you please direct to any links or your articles on VXZ. Thank you for all your guidance.

  • Hi Sunil, I haven’t written much directly on VXZ. It’s basically just a less volatile version of VXX. Less upside, lower decay rates.

  • Sunil Narayana

    Thank You Vance…that makes sense. I keep.wondering how the volumes are so low. Kind of so much disrespect to these mid term vix products. Thanks again

  • Michael Klöpper

    Shorting VXX at IB is still no problem. Question is how much sense it makes to start the trade now? Would you recommend waiting for a VIX spike before starting a short volatility investment at all or start now and double down on VIX spikes?