The iPath S&P 500 VIX Short-Term Futures (VXX) is an exchange-traded note (ETN) designed to provide investors with exposure to equity market volatility. Shares of an ETN, which is structured as a debt instrument, can be bought and sold like shares of stock.

During times of high volatility in the stock market, the value of VXX shares will typically increase. On the other hand, quiet periods for the market will likely keep shares trending lower. Here’s why.

Understanding VXX

The iPath S&P 500 VIX Short-Term Futures ETN is legally structured as an exchange-traded note (ETN), which is similar in nature to an exchange-traded fund (ETF). The main difference between an ETF and an ETN is that, while the exchange-traded fund represents ownership in a basket of securities—stocks, bonds, or commodities—within the fund’s portfolio, the exchange-traded note is an uncollateralized debt instrument and has bond-like characteristics: investors can hold shares until maturity (which is Jan. 23, 2048, for the VXX ETN launched Jan. 19, 2018) and buy and sell before maturity.

Managed by Barclays Capital Incorporated, the iPath S&P 500 VIX Short-Term Futures ETN is linked to the daily price changes in Cboe Volatility Index, but in a complicated way. VIX is sometimes called the market’s “fear gauge” because it tends to rise during periods of market uncertainty and spike in times of panic. The index tracks changes in the expected volatility priced into S&P 500 Index options and is computed using an options-pricing formula.

Futures contracts are listed on Cboe Volatility Index, and VXX is an ETN that tracks the S&P 500 VIX Short-Term Futures Total Return Index, which is designed to offer exposure to long positions in Cboe Volatility Index futures contracts. Therefore, VXX does not track VIX itself (spot VIX), but the futures on VIX, which often trade at very different price levels depending on the time to maturity.

Risks

Since VXX must roll its futures contracts to rebalance the fund to the later contract, the fund manager is forced to sell the futures contracts that are closest to their expiration dates and buy the next dated contracts, which is a process called rolling. Since longer-dated futures contracts are often at higher levels than shorter-dated ones (during normal market conditions), the rolling activity can result in losses (as the ETN is forced to sell the lower-valued contracts and buy the higher-priced contracts).

The iPath S&P 500 VIX Short-Term Futures ETN can be influenced by many unpredictable factors, and the price of VXX can fluctuate substantially between now and the maturity date. Influential factors include prevailing market prices of the U.S. stock market, S&P 500 Index options prices, supply and demand for VXX, as well as economic, political, regulatory or judicial events, or changes to interest rate policies. Basically, anything that affects stock prices can also affect volatility and VXX shares.

The Bottom Line

An investment in VXX might be suitable for investors who want to hedge their portfolios against a market downturn and speculators who have a high risk tolerance. However, since the iPath S&P 500 VIX Short-Term Futures ETN is only composed of derivative contracts, individuals should understand the Cboe Volatility Index and VIX futures before investing or trading the exchange-traded note.

One of the main goals of every trader using technical analysis is to measure the strength of an asset’s momentum and the likelihood that it will continue. Momentum measures the speed at which the price of a security is moving, and there are a variety of indicators one can look at to measure this.

Most of the indicators used to measure momentum are interpreted by using certain values that suggest the asset may be getting overbought or oversold, which is a weakening of momentum, and would signal a reversal in the trend.

Momentum indicators are bound between two extreme levels. This is important because a cross through the center line of the indicator is interpreted to mean that momentum is either increasing or decreasing and that acts as an indicator to buy or sell.

Some of the main tools to measure momentum are the moving average convergence divergence (MACD), stochastics oscillator, price rate of change (ROC), and the relative strength index (RSI).

Moving Average Convergence Divergence (MACD)

The MACD depicts the relationship between two moving averages of a security’s price. It is calculated by subtracting the 26-period exponential moving average from the 12-period exponential moving average. When this is calculated, a MACD line is created and a nine-period MACD line, known as the “signal line,” is transposed over the MACD line. This then functions as a trigger to buy or sell depending on where the MACD crosses the signal line.

Rate of Change

The rate of change is the speed at which a variable changes over a specific period of time. It is expressed as a ratio between a change in one variable relative to a corresponding change in another. Graphically, the rate of change is represented by the slope of a line and mathematically as the percentage change in value over a specific period of time and represents the momentum of a variable.

To calculate the ROC, one takes the current value of a stock and divides it by the value from a previous period, then subtracts one and multiplies by 100 for the percentage figure.

Rate of Change = [(Current Value of Stock/Previous Value of Stock) – 1]*100

A security with a high momentum has a positive ROC and outperforms the market in the short term whereas a low momentum security has a negative ROC and is likely to decline in value, which can be seen as an indicator to sell.

Stochastic Oscillator

The stochastic oscillator seeks to measure the closing price of a security to a range of its historical prices over a defined period of time. It is used to generate overbought and oversold trading signals using a 0–100 bounded range of values. Values over 80 are considered to be in the overbought range and values below 20 are considered to be in the oversold range. When values reach these points, they typically indicate a reversal of the trend.

Relative Strength Index (RSI)

The RSI measures the magnitude of recent price changes. The RSI looks at average gains or losses over 14 trading periods. Much like the stochastic oscillator, it uses a bounded range value of 0 to 100 to mark overbought or oversold conditions in the price of an asset. Values that are 70 or above indicate an overbought security, whereas values of 30 and below indicate an oversold condition.