VXX – how does this work?

The simple answer:

<<<What is it and how does it work?>>>

The VXX fund is ultimately based on the VIX index. The VIX index is based on the implied volatility of S&P 500 option contracts.

The implied volatility of an option does not measure how volatile anything has been in the past. Instead it measures how volatile option traders expect it to be in the future based on the market price of the option contracts.

The VIX index is often called the "fear index" because the more volitile an investment is, the riskier it is. The S&P 500 index is often used as a surrogate for the entire stock market. If the price of the S&P 500 index is expected to be volatile, the whole stock market can be expected to be more volatile. If the whole stock market is more volatile, investments in the stock market are riskier.

<<<What would have to happen for the price to double, to say $60?>>>

Option traders, through the open market system, would have to bid up the prices of options based on the S&P 500 index. This would only happen if they were afraid the stock market was riskier.

<<<Wasn’t a year ago less volatile than last week?>>>

It does not really matter. What does matter is how volatile the market is expected to be, which is also also a good indication of how fearful people are.

The comprehensive answer:

A truly comprehensive answer would require you to understand how futures contracts and option contracts work, as well the way option contracts are priced. That is too much to include in the space provided.

If you already have that background, all I need to say is that VXX is made up of short-term futures contracts on the VIX index. The VIX index is discussed in some detail at

http://www.cboe.com/micro/vix/introduction.aspx

(While going through material at that site it is worth remembering that the site presenting the information makes money by people trading options and futures on VIX, so expect them to emphasize the good points and spend less time on the problems.)