The chart below lists the VXX reverse split adjusted prices and the price at each time the Short & Hold position ROI doubled from the previous price. The first entry is the starting price of VXX that began trading back in January 2009. When VXX reaches $8, the strategy would have generated 10X return since inception following the short & hold strategy explained below.
The Short and Hold VXX strategy requires re-balancing the short position value back to the initial investment value each and every time VXX drops by 10%. This re-balancing strategy is explained in detail below.
A short position ROI rises as the price of the financial asset (stock/ETF/futures/etc) drops, but the position value also decreases at the same time. Without re-balancing, the short position ROI will decrease as the price drops. The opposite is true for a long position. A long position ROI keep increasing with the rise in price. To maintain the initial short position capital investment value, the short position requires re-balancing, or adding shares, as the price drops to maintain the initial investment value.
The question is how often or when should a short position value re-balance for optimal returns. A systematic approach is to re-balance each time the price drops by a fixed rate amount. The chart below analyzes re-balancing at 7 different rates: 1%, 2%, 5%, 10%, 20%, 25%, and 50%. This analysis is using a starting price of $100. For each case, the chart shows the number of re-balancing trades till the position gains 100% ROI. For each case it also lists the price of the asset when the position gain 100% ROI as well as the percent drop from $100. Based on this analysis, re-balancing the short position at every 1% drop achieves 100% ROI quickest. Re-balancing at 25% or 50% achieves 100% ROI slowest. Re-balancing at smaller rates, although requires more trades achieves highest gains.
