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Adoption Of VXUP As A Hedging Instrument Could Transform Investment Management

VXUP is revolutionary. VXUP could become a key hedge for non-correlated portfolios. VXUP deserves to become a billion-dollar ETF. Spot CBOE VIX Up Class Shares (NASDAQ: VXUP ) could transform investment management. While I am very empathetic to the notion put forth in yesterday’s article that the daily movement of the ETF currently lags the responsiveness of the raw VIX index, the recognition, appreciation, and acceptance of VXUP’s benefits should dramatically increase its trading volume. In turn, the increase in VXUP’s trading volume should make it much more responsive to changes in the raw VIX index. And this increased responsiveness to the raw VIX index will further increase the ETF’s value as a hedging tool, in a virtuous cycle. The general acceptance and adoption of VXUP as a hedging instrument should transform investment management in a variety of ways which I will specifically illustrate. Indeed, I believe that the investment community will quickly realize the immense profitability of promoting a very healthy level of liquidity and AUM in VXUP. Yesterday’s article did an excellent job of explaining VXUP’s mechanics, along with that of its inverse ETF VXDN (NASDAQ: VXDN ). I will not recreate the wheel here. However, I will point out numerous examples of strategies which could be vastly improved by the use of VXUP as a hedging component. Indeed, as a hedging instrument, it is totally irrelevant whether VXUP is perfect. What matters to the investor is whether or not VXUP is a drastic improvement over every other ETP hedging alternative currently available. I will argue forcefully that VXUP is vastly superior. The ZOMMA Index Master Sheet is an exhaustive list of ETP strategy indices and their variations that we have published on seekingalpha and sometimes in books. I forcefully argue that for any of the strategies which use iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA: VXZ ), iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ), or ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) as a hedging component, that the performance of those strategies could be vastly improved over multi-year periods by replacing the use of VXZ, VXX, and UVXY with VXUP. Theoretically, there are very short, discrete time periods where backwardation could benefit the use of VXZ, VXX, or UVXY. However, it has been definitively illustrated by dozens of studies that over longer times frames, persistent contango tends to cause an uncomfortable amount of performance drag when using these instruments as hedges. On one hand, I have argued that all of the strategies illustrated in the master sheet should no longer be used due to their correlation to long bonds. On the other hand, reducing the size of TMF, and making VXZ, VXX, or UVXY larger percentage allocations in an effort to reduce the strategies’ long bond correlation and diversify hedging sources kills upside performance due to contango lag–equally unacceptable. VXUP would solve this problem elegantly, allowing larger volatility-related hedges, which could reduce the correlation of the strategy indices to both stocks and to bonds, while eliminating contango lag. I have argued forcefully that the nightmare scenario for the financial markets is for both stocks and bonds to crash simultaneously. On 3/11/2015 , I wrote: The sad joke of financial markets is that they are driven by long term interest rates, which set the discount rate for all other asset classes. And indeed, dropping interest rates have made speculators of every stripe look brilliant. Imagine a high jumper who is constantly buoyed by a dropping force of gravity. His athletic prowess appears to be improving, but instead, the force of gravity is becoming weaker. And conversely, rising gravity, or interest rates, cause moving objects to drop to earth more quickly. Moving objects like stock prices, bonds, real estate, and even gold. Every asset class will be affected by rising rates. Since then, the TLT ETF has dropped from $127 to a touch below $117. Imagine a nightmare scenario is which both stocks and long bonds dropped by 50%, due to a spike in interest rates. In such a scenario, it is almost facile and axiomatic to point out that volatility would skyrocket. A hedge like VXUP would be absolutely essential to reduce a portfolio’s correlation to both stocks and to bonds during such a nightmare. Moreover, if stocks and bonds do not simultaneously collapse, a lower correlation to both asset classes will not hurt the investor seeking an authentically non-correlated return stream during more normal regimes. So returning to the issue at hand, the use of VXUP as a hedging tool potentially allows the serious investor to reduce a portfolio’s correlation to both stocks and to bonds without the continuous contango that a VXZ, VXX, or UVXY position would entail. And without contango, the new VXUP volatility hedge could be comparatively larger without the associated drag of pre-existing alternatives. So it is largely irrelevant to the serious investor whether or not VXUP perfectly mirrors the raw VIX index. No hedge is perfect. There are merely hedges which are far better than any available ETP alternative! And VXUP is that far better hedge. As the investment community realizes it and volume in the VXUP increases, ironically, the VXUP should better mirror the raw VIX and even further outpace the competition as the most serious tool in the hedger’s toolbox. The portfolio manager’s dream has always been a continuously traded put option of sorts, which can serve as a shock absorber to a portfolio, without the drawbacks of a put option’s time decay or a volatility future-based instrument’s contango (which some would call synthetic time decay). The VXUP should become that continuously traded put option. Nothing else which has been introduced in the ETF world comes close to the VXUP in achieving that goal. I am not an expert in ETF design, but the goal that VXUP seeks to achieve is exceedingly shrewd. I would argue that increased volume, AUM, and acceptance will make the instrument more robust, useful, and demanded. Disclosure: I am/we are long VXUP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Go Long SPY Now – Market Turn At Hand

The market has accounted for its fear of the ECB and Greece year-to-date, and I believe stocks have mostly sold off in 2015 because of rumors around these events. But as rumor fades into news, stocks are poised to enjoy a relief rally, and SPY is already off its lows marked on January 15. While the Greek election results are likely to revive some fear next week, I am already taking long stakes in stocks and view SPY okay to buy in increments. It’s time to start going long the SPDR S&P 500 Trust ETF (NYSE: SPY ), aka the U.S. market, as I see a turn sometime between last week’s low and the end of the month. If I am correct that the European Central Bank (ECB) action and the Greek election and its potential repercussions have greatly swayed currencies, commodities and stocks year-to-date, then a turn may be in store in the very near-term. My reasoning is based on my belief that stocks have mostly priced in worst case scenario fueled fear, and that reality will be much less scary than expectations. Stocks seem to have already found stability, with a recent bottom marked on January 15 for SPY; and many names are rising into their earnings events now, some of which I have taken long stakes in over the past week. I’ll talk about those in dedicated articles. The market has priced in a ton of fear year-to-date, I believe around the Greek election and its potential election to drop out of (or be dropped out of) the euro-zone thereafter if the big demands of its expected new leadership are not met. But, I expect the end result of events in Greece will prove much less threatening than the market has priced in, offering opportunity for relief rally as events unfold this weekend and next month. Thus, we appear to have set up for a sell the rumor, buy the news turn of events, and it’s about time to start buying in increments here. Volatility has dropped off significantly over the last two trading days, and I’m pulling my hair out for not taking that short position in the iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX ) I had been contemplating through put options. We may get another spike in the VXX Monday after the Greek election results come in, so there could be another opportunity yet. But as for the market generally, I think it’s okay to start taking stakes in stocks again and the SPDR S&P 500 is a great way to do that. I surveyed some of my Greek contacts and have contemplated the situation; there seems to be the possibility that risk may have been overly priced into stocks around the Greek election due on Sunday. The new disruptive political party Wall Street and Brussels are concerned about, Syriza, is not the threat to European and global stability our press indicates it is. Yes, Syriza will push for renegotiation of the terms of the money Greece owes its European partners and other parties, but it will not default on that debt in my view. In other words, a Grexit is not going to happen as far as I see it. SPY’s page at Seeking Alpha shows it is only down 1.2% year-to-date after gaining back roughly 2.9% since the January 15 close. Many pundits I’ve seen talk about the market seem to conclude the valuation of the S&P 500 Index is not so cheap, with an index P/E multiple of roughly 18.8X, versus historical mean closer to 15.5X. However, the index multiple on forward estimates is 16.65X according to the WSJ page linked to above. Let’s not forget that our economy is growing at an accelerating pace and that the unemployment rate has been decreasing at a better than expected rate. Europe has its stimulus now, but the region’s decline and even China’s slowing growth are not a huge a threat to our economy anyway; that is especially true now that gasoline prices have come down so much (I’m looking for oil prices to stabilize and rise soon). My friends, I say face fear and start buying stocks now in increments and more so as we get passed this Greek election event. It will drive fear again into stocks next week, but I expect that would only open further opportunity for U.S. investors to buy SPY and stocks generally for benefit later this year. This thing has been overblown. My mouth is watering over some of the valuations I see considering this economy’s strength, so I’m gritting my teeth and buying stocks.

Am I Crazy Enough To Short Volatility Here?

Recent volatility in stocks has presented yet another opportunity to profit. The VXX has moved up sharply after I went long and as a result, I sold my position. I’m now back to being short the VXX on a bet that the markets will calm down this week. Early last week I wrote a piece about how I had gotten short volatility and then reversed quickly after realizing the market was moving against me. That proved to be a fortunate thing to do as I missed the big move up in volatility (in the good way) by not being short. As I detailed in the linked article, I chose to get long right as I sold out of my short position via the short VXX ETF (NASDAQ: XIV ) and moved into a long position in the VIX ETF (NYSEARCA: VXX ) while hedging with covered calls. In this way, I wanted to capture huge premiums that were available on VXX call options and also take advantage of what looked like a coming move up in volatility. As it turns out, that was the way volatility moved last week and the VXX closed up huge on the week. I was fortunate enough to capture most of that move but by hedging with short calls, I did give up some potential upside. Still, being long the VXX for four trading days and hedging with calls netted me a 6% total gain in four days; not bad work if you can get it. The flip from short to long volatility certainly worked out in my favor and given the gains that I achieved in such a short time span, I carefully considered my next move for this week. In doing so, I considered where the VXX had come from and how far it had moved since having a big downturn. This is a one year chart of the VXX and what it shows, as most of us know, is that VXX tends to spike when it does go up and then fall precipitously seemingly without warning. (click to enlarge) I started shorting VXX back in October during the mini-crash that roiled stock markets and since that time, have had pretty good results getting long and short volatility at different times. The most recent spike that has driven VXX up to as high as $37 seems to be running out of steam, in this humble trader’s opinion. And therefore, I’ve decided once more get short volatility via the XIV, the ETF that provides the inverse, unleveraged return of the VXX. For reference, I sold out of the VXX at $36.63 and bought the XIV at $26.45 a few moments later. If you like, of course, you can just short VXX but that’s expensive and difficult to do so just buying XIV is much cleaner. At any rate, the decision was made to get short volatility because I feel like the fear and panic was wavering at the end of the week. Several days of markets being beaten over the head with terrible news and heavy selling tends to exhaust traders and in a world where the central banks of our nations can move markets higher simply by talking, I feel like recent history provides decent precedence from which we can derive the duration and severity of up moves in the VXX. Of course, nothing is perfect and I could be dead wrong about this move being done but in order to make some money, you’ve got to take calculated risks. For that reason, I think getting long XIV here makes lots of sense. There is no doubt that the VXX clearing its previous high from December means we’ve got a situation on our hands. There are plenty of reasons for volatility right now but what I’m betting on is that there will be at least a small reprieve from the panic. Panic, by definition, can only last for so long so a trade into XIV is a bet that the panic is ending and that normalcy will return, at least for a few days. Keep in mind that you don’t need to be right for a long time to make money on this trade; I’m essentially renting XIV until some calm returns to markets again and then it’s back out of the short volatility position. As always, please understand that trading volatility, particularly from the short side, can be quite hazardous. If some shock occurs VXX will spike and XIV will crater, leaving you with massive losses. Please understand how the ETF works and what you’re risking before taking a position. The plan right now is to stay in XIV until one of two things happens; either normalcy returns to markets and XIV moves up very nicely or I’m dead wrong and I get crushed and limp away with my losses. Either way, I think we’ll know this week which one it is and at that point, I’ll reassess which side I want to play on the volatility front. In my first volatility article of 2015 I mentioned I’d keep you abreast of my thoughts and any moves I ended up making and I’m trying my best to do that; please remain engaged in the comments sections because we’re all learning together and sharing thoughts and ideas and I love it. Good luck out there.