Opportunity Knocking in the Form of a VIX Spike

Sometimes I like to skate around some of the salient points of volatility rather than try to hit readers over the head with them. But with the VIX now 16% over its 10-day simple moving average, I hope I am not the only one going short volatility. Specifically, anyone who has been paying attention to my comments about VXX should be looking at opportunities to get short this VIX ETN.

At the moment, not only do short VXX positions have mean reversion going for them, but even with the spiking VIX the VIX futures are still in contango, meaning that they are upward sloping over time, with the second month more expensive than the front month. The chart below shows that while the difference between the second month VIX futures and the front month VIX futures has been declining, it is still substantial, which translates into a meaningful negative roll yield that continues to work in the favor of shorts.

Finally, not too long ago VXX was difficult to short at most brokers. This is not the case any more (click to enlarge).

[source: FutureSource]

Disclosure: Short VIX and VXX at time of writing.

Comments

[Jasper M:]

Oh. Oh, no, no, no. Don't Do that! There are events coming, the response to which on the VIX I am quite confident will erase the influence of mean reversion, and such.
VIX has been called a measure of fear. I will qualify that to say it Can be a measure of fear. And there is plenty of fear on the way.

Oct 28 01:31 PM

[HouTX:]

I made a nice pop today on it long. I think your mean will be increasing as the threads keep unraveling on this sham rally.

Oct 28 04:16 PM

[GoochyPuppy:]

Let it swing... the VIX will undulate like the rest of the market and both long and short Vega positions can be profitable if hedged and swing traded.

Oct 29 12:51 AM

[MarkitWacha:]

You're right. The underlying SPY is over its moving average and is due for a minor correction. That translates to a spike in the VIX, as selloffs occur more emphatically than uptrends.

Good article, but the causality is misplaced.


On Oct 28 04:16 PM HouTX wrote:

> I made a nice pop today on it long. I think your mean will be increasing
> as the threads keep unraveling on this sham rally.

Oct 29 11:07 AM

[MILESCFA:]

Fascinating concept, which makes me wonder... The shape of the yield curve can tell a lot, like the warning given by an inverted yield curve. Have you looked at what insight the term structure ("yield curve") of VIX tells you?

www.cboe.com/micro/vix...

FYI: I could only find VIX futures info on the CBOE website above. I have a hard time finding VIX futures quotes, being neither on my ThinkorSwim nor TradeStation platforms (futures "turned on" on both). Also, ThinkorSwim shows VXX as "hard-to-borrow", so while your concept is fascinating, where do you find it "not difficult to short anymore"?

Oct 29 11:07 AM