Tag Archives: vxx

Up 25% In 2 Weeks, I’m Out Of My Short Volatility Trade

I recommended shorting VXX two weeks ago at the height of the Greece situation. That trade is up about 25% in two weeks as VXX is making new lows. Contango is still high so shorting VXX will still be profitable but I’m ringing the register here. A couple of weeks ago I wrote an article about the short term volatility ETF VXX (NYSEARCA: VXX ) during the height of the nonsense coming out of Greece. At the time panic levels were elevated and the VXX had climbed nicely from $17 to $21+ and the VIX term structure was nearly flat in the near months. That, combined with what I was quite sure was a situation that would be resolved peacefully by the EU, led me to believe VXX was expensive at $21.51 and I said investors should short it from that level. If we fast forward to today that proved to be the near exact top in VXX and we now see it making new lows once more. That trade worked out very nicely but what do we do now? (click to enlarge) The spike in VXX was pretty easy to call because the situation in Greece was blown way out of proportion. It is events like this that I love because people panic and provide us with very easy opportunities to make 20%+ gains in a matter of a few trading days by shorting VXX into these types of things. But now that it is over and the VIX has tanked once more, I think more caution is warranted in trading VXX. The easy spike in the VIX that allows us to take advantage of short opportunities in VXX is gone but contango in the VIX term structure is still very high as out months are elevated compared to the front month. This chart from vixcentral.com shows us that while the VIX spike premium is out of VXX there is still a lot of contango in the term structure so VXX will decay pretty quickly at these levels. This chart puts a magnitude on the contango as you can see the cost of holding VXX is very high right now. That means you’ll see sizable gains over time shorting VXX but the potential for huge short term gains is gone. I like to short VXX when it spikes and contango evaporates because that is a highly unsustainable position as you can see from this chart. At this point we just have negative roll yield and while that’s a powerful force in shorting VXX, it is a medium term story and not a matter of a couple of days. As a result, I’m ringing the register here. My short VXX trade is up ~25% in a couple of weeks and while contango is very high and there is still money to be made shorting VXX, I’m content to take my gains and move on. I’m not calling a bottom in VXX because the bottom continues to go lower but I am saying the easy money has been made. I’ll short VXX again at some point in the future but simply collecting the roll yield when the market looks like it might be topping is too risky for me. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (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. Share this article with a colleague

History Says Shorting Volatility Is The Right Move Here

VXX spiked almost 17% on Monday. That is the fourth largest move it has ever had. I believe this represents a unique opportunity to benefit from panicking investors. In the last couple of months of last year and into 2015, I spent a lot of time trading volatility (NYSEARCA: VXX ). I was fortunate enough to have pretty good success but when markets largely calmed down earlier this year, there wasn’t much going on. Well, for anyone that wasn’t under a rock on Monday, volatility returned all at once as the VIX spiked 34% on the day amid worries imported from Greece. I won’t go over the Greece drama because you can read about it many other places so in this article, I’ll focus directly on what I think is a very tradable move in the VIX via the ETF VXX. (click to enlarge) We can see the move in the VXX yesterday was absolutely massive. It gapped up on the open but that was just the start of the action as we can see from the chart. That sets up what I believe is a reasonably high risk, high reward setup in volatility that investors can consider if you believe the Greek crisis will be a ‘sell the news’ kind of event. The VXX moved up nearly 17% on Monday so that got me to thinking; that’s a huge move, how many times has this happened before? I pulled pricing data since VXX’ inception from Yahoo! and looked to see how many daily moves were in excess of Monday’s gain and the answer is just three. Three days in 2011 (two in August, one in November) posted up moves of more than Monday’s 16.8% move. First off, there have been more than 1,600 trading days for VXX so the fact that Monday’s move was larger than all but three days is quite extraordinary in itself. That alone would suggest a bit of value seeking may be in order simply due to the magnitude of the move. However, the three days in 2011 that saw moves this large were in the midst of a global meltdown in stocks. The S&P was getting crushed along with every other major index around the world so shorting the VXX after the first spike in early August would have been a rough trade. Here’s what happened starting with the day of the first 17%+ spike up in VXX back in 2011. VXX almost doubled after the first move up so in today’s terms, we’d be right there at the beginning of this chart if the pattern repeats. Shorting VXX would have produced sizable losses until the end of 2011 when VXX began to normalize. It looks like a blip on this chart but four months of gut-wrenching losses can get the best of anyone. That is why I always reiterate that trading volatility is not for everyone. There are days when you get crushed and you have to take the pain but if that’s not for you, there are plenty of other instruments to trade. The other point I wanted to make with this chart is that even though VXX nearly doubled after a similar spike to what happened on Monday, in time, it returned to its normal, wealth-destroying self. That is what I want to take advantage of and given that Greece is a small sliver of the Eurozone’s economic output, I’m betting that is exactly what is going to happen. I can’t tell you when it will happen but one thing I know with virtual certainty is that VXX will spike and fall as it always does. I don’t know how high it will go before it falls but fall it will and when it does, it will probably fall hard. That has been the pattern and I’m betting it will take place again. I bought some (NASDAQ: XIV ) on Monday as a way to short the VXX in a virtually costless way and to take advantage of when the VXX does roll over and begin to destroy wealth again. If the market is down again on Tuesday I will buy more because there is a very small chance this trade won’t work out in the favor of VXX shorts over the medium term. VXX is a trading vehicle that erodes value over time so holding the inverse creates value over time, on average. You can put the odds more in your favor when you short into intense strength like what we saw on Monday so that is what I have done. Best of luck out there, it should be entertaining. Disclosure: I am/we are long XIV. (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.

The VIX: What It Is, What It Isn’t, What To Do About It Now

Summary Widely regarded as the “fear factor” forecaster of stock market price declines, it has an irregular, unreliable pattern of prophecy. Perversely, it is a much more reliable forecaster of general market index recovery. What should we believe it is telling now? How best to profit from its ODDS and PAYOFFS of prior outcomes? Where the VIX comes from The basic equation of stock option valuation contains several interrelated factors, including the underlying stock’s price, which when solved provides an appropriate price for each of the several available strike-price and expiration-dated option contracts. One of the key input factors common to all the contract price solutions is the issue of uncertainty present for the underlying stock’s future price. From the start of trading in listed stock options over 40 years ago, options traders turned the contract pricing formula around and accepted the market’s options trading prices as inputs, in place of the uncertainty component of the equation, and solved for the stock’s “implied volatility.” Traders discovered that the degree of “implied vol” for each stock tended to have a usual level of uncertainty across time, and being aware of current variances from its norm, provided them with profitable trading insights into future prices. By applying this approach to options on a market index, the Chicago Board Options Exchange [CBOE] in 1983 devised and copyrighted the term VIX to designate an index measure of the S&P 500’s implied volatility. The VIX Index is quoted in percentage points and represents roughly the (thus derived) expectations of potential change of the S&P 500 in the next 30 days. Direction of change is not indicated. If it’s a Fear Index, why does that matter? That should be obvious, but let’s test it out. We go to a reliable, available source for data, like Yahoo Finance, and obtain all the available daily data history for the VIX Index (since 1/2/1990) and for something appropriate that we can easily trade, like the SPDR S&P 500 Fund ETF (NYSEARCA: SPY ). It is available from 1/29/1993, downloaded in .csv (comma separated values) for easy use in a spreadsheet tool like Excel. There are well over 5,000 days of data to use, over ten years worth, plenty to offer statistically reliable inferences. Matching up the dates from the two data sets, we calculate what has been the worst possible price change for SPY in the coming 3 months after each day, and compare that with the VIX Index value at the initial date. Figure 1 shows what we get. Figure 1 (click to enlarge) The VIX Index in these 11 years never got much below 10, and days measuring above 30 start to get sparse. Much of the time between its 10 to 15 value looks to be completely random. There the worst next-3-month market declines are concentrated around -5% to -7%. Days with VIX above 15 start to see a shower of more substantial declines, plus a lot of the less than -5% kind. The best-fit line confirms the general relationship of higher index numbers with larger market declines. But the far fewer large outliers seem to dictate the fit relationship, compared to scads of close-in, small-scale comparisons. Just to be fair, let’s look at the other side of the coin: What were the market’s best days in the next 3 months, compared to the “fear-factor” advance warning? Check out Figure 2. Figure 2 (click to enlarge) This looks strangely like a mirror of Figure 1’s market moves to the downside, hinged along the zero% change line. Now the relationship line shows increasing market price gains as the VIX Index is higher. Where the index is small, the level of determination is small to any degree of specificity. Figure 2’s contrast with Figure 1 demands some more inclusive measure of the usefulness of the VIX as a forecaster of coming market behavior. In Figure 3, we attempt this by relating the index levels to a fixed holding period price change in SPY. Our first effort, using 3 months as a test period does not provide any motivation to believe that a longer or shorter holding would create much difference. Figure 3 (click to enlarge) VIX Index values over a long period of observations have proven by themselves to be a truly rotten forecaster of likely subsequent market price changes, either to the downside, the upside, or simply on average. Figure 3 has a relationship line basically independent, one of the other. One encouraging thing about this is that the presence of the VIX Index may have helped keep the market balanced, as evidenced by there being no sign of a pattern of advantage created by the presence of this sophisticated analytical measure. Its early benefits, if any, were quickly arbitraged away by astute observers. Inherent in the nature of the VIX Index’s creation is that it tries to define uncertainty, rather than differences of value from some norm or standard. The statistics involved can identify levels of uncertainty, but lack any useful directional sense in their derivation. When the game changed In early 2006, options on the VIX Index (VIX) itself were listed by the CBOE and began trading on a daily basis. That permitted us to show what the market’s own actions have as a forecast of this presumed market forecaster. But now dimensions of price change direction now are being shown, when the means of making such forecasts are known, as we do using behavioral analysis principles. What are today’s directional indications for the VIX? Figure 4 presents this past Friday’s closing-prices-based forecast for the VIX Index in its most right-hand vertical bar. It represents a range of that index’s potential market quotes in coming days, weeks, and few months. Figure 4 (used with permission) Readers of our Intelligent Behavior Analysis articles on Seeking Alpha are familiar with the measure we use to identify likely directional emphasis resulting from the analysis. We term our measure the Range Index [RI], calculated from the price range being forecast by the analysis of the investment subject. It indicates what proportion of the whole range lay downward from the current price. In Figure 4, the RI of the VIX is 7. That means 93% of the forecast range is to the upside, a typically strong condition. With a current market quote of $14.30 for the VIX and an upside limit to the range of $18.82, a rise in price by +31.6% is viewed as likely enough to be possible that parties becoming at risk to changes in its price are willing to pay for protection against the change, should it happen. The possibility of a complementary price decline works out to a -2.5% change. At these extremes, there is about a 13-to-1 prospect of advantage on the “reward” side over the “risk” exposure (of a bet on the VIX). We have devised a simple, but powerful, investment portfolio management discipline that functions very effectively using this kind of information. We use it as a standard of behavior to compare the investment desirability of virtually all of the roughly 3,500 equity securities examined daily. Applied to the VIX, its results appear in the row of data between the two blue-background pictures of Figure 4. The results are that in the 124 prior instances of the 1,261 market days in the last 5 years where a 7 RI of the VIX occurred, 76% of them were profitable experiences. The net gains in all 124 earned +24% gains in average holding periods of 36 market days, which would have produced an average annual rate of return of +355%. If the VIX were a security that could be bought and sold, most likely this would be a good point in time and price to buy it. But the VIX is an index that cannot be bought or sold as a security. There are, however, ETFs that are based on movements of the VIX Index that can be traded conventionally. Ready to get confused? This is where two logical inversions take hold of the task of making money from what can be known about the VIX, its dependent ETFs, and the market as evidenced by the S&P 500 Index, or SPY. The first inversion comes from investors’ normal association with being “long” in assets that rise sympathetically when the “market” goes up. The “price” of the VIX is a measure that rises when the market unexpectedly goes down, reflecting increasing investor uncertainty. And uncertainty is what the VIX measures. So, when market prices go down, VIX Index goes up. The second inversion comes from investors’ usual attempts to find forecasting tools that will anticipate market moves, allowing them to position themselves to be drawn along by or accentuated by the market’s investing gravity. As we showed in our prior article about the VIX, the sequence is reversed here. It is the market’s actions that forecast subsequent VIX-related price moves, not the other way around. Then there is simply a complexity in that the ETFs related to the VIX are most directly denominated not by the VIX Index itself, but by the prices of futures contracts on the index. While there are logical parallels, each security has its own markets, with frequent individual local influences that may obfuscate otherwise reasonable expectations. Arbitrage here is not a game for the casual practitioner or the dilettante. The array of ETPs at hand includes: iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) ProShares VIX Short-Term Futures ETF (NYSEARCA: VIXY ) ProShares VIX Mid-Term Futures ETF (NYSEARCA: VIXM ) VelocityShares VIX Short-Term ETN (NASDAQ: VIIX ) ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY ) Their MM forecasts and forecast history details are in Figure 5. Figure 5 (click to enlarge) Remember please that the orientation of this data is from having or taking a long position in the designated security. All except SVXY are expected to go up in price when the S&P 500 goes down meaningfully. SVXY, being a security that is short its VIX futures holdings, should rise when the VIX futures go down. Further, all of the historical data (in columns 6 and 8-15) is from the standard portfolio management discipline applied to prior appearances of forecasts with upside to downside balances like today’s, as indicated in column (7). Tomorrow or a week from now, these balances are likely to be different, and if so, decisions at that time need fresh historical backgrounds. But at this point, the attractiveness of a long-position bet in each is ranked by the figure of merit in column (15). It attempts to blend odds of profitability with win-loss ratios and frequency of prior opportunities specific to each issue under conditions like the present. Conclusion On this basis, the VIX Index itself is the best bet, but one not directly placeable. Certainly, the efforts of Greeks and the EU keep the VIX uncertainty pot boiling. The implication is that the S&P 500 Index is likely to encounter a decline in the next 3 months, significant enough to pop the VIX from 14+ to near 19. But the cost of making that bet through VIX futures is already priced high enough that the odds of making money at it are less than a coin-flip and as little as one in 8 or one in 12. The sole exception to such a dismal proposition is that over the course of the coming 3 months, the S&P is seen likely to rise sufficiently to generate a profit in SVXY from here in nearly 8 out of 10 tries. In the past, such propositions (43 market days out of the nearly 3 years of that ETF’s existence) have generated net gains of over 8% in less than 6 weeks of average position holding times for a +98% annual rate of gain. Now, that’s pretty attractive. But there is a possibly better strategy than just buying SVXY here. If the market pros who daily express their views about the near future of the S&P 500 via hedging in the index futures markets are right and the VIX odds say they are right 3 out of 4 times (76 out of 100), the SPX and the SPY are likely at that new lower point of the S&P 500 to be supporting an even better (lower) buying price on SVXY than it now has. Many variations of action implementation can be imagined. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.