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An article that I wrote last week laid out three reasons that I was short volatility by shorting the black hole that is the iPath Short-Term VIX Futures ETN (VXX).

We had just witnessed the VXX spike about 20% in two days, and every single time that's happened during this current bull market, it's come back down to paint lower lows just weeks later - as you can see from the chart below.

Although the VXX wound up gaining again the day of my short at $17.10ish, I decided not to close my puts. VXX tanked to end the week around $14.75, but is up again Monday on the news that the government hasn't come to any type of resolution yet. Make no mistake about it, the VIX is moving with direct correlation as to whether or not the government is making progress on reopening and addressing the debt ceiling.

For more on my initial reasoning, and some background information VXX, why it's a sure-fire short here, and how it operates, check out my previous article.


(Click to enlarge)

You can call me disconnected from reality, or just plain stubborn, but with the way this country views financial policy; the stimulus, the inflation, the "too big to fail" attitude. There isn't a chance in hell that the two parties are not going to come to some sort of debt ceiling agreement. When they do, volatility is likely to fall off a cliff again.

It's for this reason that I'm likely going to add to my VXX short today, on the spike.

The risk? There isn't too much, in my opinion. The likelihood of the government allowing the U.S. to default for the first time in the country's history is probably around 1%. They may take it down to the wire (which could, in turn, spike the VIX), but they're not going to let a default happen.

In the case of a default, anyone short the VIX like myself, would face an ugly cover. But, I'll contend that we're not going to make it to that point; and if we did, covering a small short is going to be the least of our problems, as that market is likely to get destroyed across the board.

As I reminded in my last article, making money on VXX or other volatility instruments is all about making sure that the short-term timing is right. Sure, you can get burned on small spikes of the VIX, when shorts are squeezed out of VXX - but, remember being short is almost the de facto position for VXX.

I contend that shorting on the small VXX spikes this week remains the correct volatility trade.


(Click to enlarge)

Ways to Trade Volatility

  • Buy ETPs that track the VIX, like CVOL or VXX
  • Buy VIX call options
  • Buy call options for VXV
  • Buy S&P VIX Mid-Term Futures VXZ
  • Buy S&P 500 VIX ETF listed as VIXS
Source: Happily Shorting Volatility As Debt Deal Imminent