Bill Luby

Registered investment advisor, bonds, etf investing, commodities
Bill Luby
Registered investment advisor, bonds, ETF investing, commodities
Contributor since: 2008
Company: VIX and More Subscriber Newsletter
However you choose to proceed, you should keep an eye on XVIX, which is simultaneously short 50% short-term volatility and long 100% mid-term volatility. It may not be exactly what you had in mind, but will likely inform your thinking further on down the road.
Cheers and happy holidays,
-Bill
Hi convoluted,
Sorry for the belated response. My intent is not to dole out strategy advice, but I would be somewhat wary about selling VXX puts, unless I were compensated highly for them. Selling calls has more long-term appeal, but risk management becomes a huge ordeal with this strategy. Yes it may be possible to amortize the cost of owning VXX, but owning VXX is somewhat of a swinging for the fences play. Personally, I would have been disappointed to have sold covered calls on any volatility product in April 2010 when the VIX tripled in only one month.
Something to think about, anyway.
-Bill
Hi nitroae23,
Apologies for the belated reply.
Regarding XXV, yes it does not capture the full inverse of VXX. If you are looking for an inverse play that does a better job of tracking -1*VXX, I recommend you check out XIV.
-Bill
Hi Whitehawk,
The pricing supplement link from my original CVOL post still works for me:
sec.gov/Archives/edgar...
From that document:
"CVOL ER Index Methodology
The CVOL ER Index (Bloomberg ticker: “CVOLE”) models the returns on a combination of (a) a long position in a portfolio of third- and fourth-month VIX futures contracts that are rolled continuously on each index business day, multiplied by a factor of two and (b) a variable weighted short position in the S&P 500® Total Return Index as reduced by the Treasury Return"
I hope this helps.
-Bill
Good point about the visibility of the lines. I have edited the chart and the next time around it will be much easier to read.
Cheers,
-Bil
While I understand your caution, the focus on VIX futures in the 3-4 month range should minimize much of the contango problems associate with VXX. As CVOL launched today, we will know fairly quickly how it performs relative to VXX.
Cheers,
-Bill
Like other aspects of marriage, that one takes a bit of work...
Time to get long apes.
Hi, Robin,
I am not convinced that the volatility hedge is implemented in ideal fashion, but it should definitely be effect if volatility is trending higher.
Also, thanks for the kind words about the newsletter. I am delighted to hear that the newsletter is hitting a sweet spot for you. My intent has always been to make it comprehensive, but readable and affordable for a broad audience.
Cheers,
-Bill
Interesting...and definitely worth a click through.
I would be careful selling VXX puts unless we get an even bigger VIX spike than what we have today.
In general, when I talk about the longer term with VIX and VXX, I am referring to where the term structure starts to flatten out. In the chart above, that would be the Jan expiration as of Sept 13; in my post yesterday, linked below, that would be more like the March futures/options or perhaps February:
vixandmore.blogspot.co...
Cheers,
-Bill
The three largest components of residential (at least in REZ) at the moment are apartments (47%), health care (37%) and self storage (13%).
So if you consider an ugly housing markets is forcing people out of their homes, this would generally increase demand for apartments and self-storage facilities (assuming most people would be downsizing from their house to an apartment) which is 60% of this ETF. Ironically, here you have a residential real estate ETF that is actually structured to perform well in a deteriorating residential real estate market!
Health care is largely driven by demographics and off the cuff, I'm guessing it is reasonably uncorrelated to the residential real estate market.
Thanks for the comments.
-Bill
Michael,
Your questions points to where I might wish to tweak the model a little, or at least incorporate some counter-trend cycles, just as Elliott Wave theoreticians do.
But keeping to the graphic as presented, there are two separate distinctions: absolute and relative states of mind. Denial implies the inability to acknowledge that the major trend is down, whereas hope implies that the major trend is up. In a sideways market or market with a lot of counter trends, this distinction starts to get a little blurry.
Another way to answer your question is to ask whether we are in a bear market that began in 2000 or 2007 -- or in a bull market that began in 2009. I think the way one answers that question has a lot to do with how they look at the investor sentiment cycle and where they see the current state of the markets.
Cheers,
-Bill
VXX and leveraged ETFs do exactly what they are designed to do. As you are aware, the problem is that over time these investments provide a negative return for the long-only buy and hold investor.

It is important to understand, however, that if the VIX spikes, the VIX futures term structure typically changes from contango to backwardation, so an investor holding the underlying will be rewarded first by the increase in volatility and second by the positive roll yield from the VIX futures term structure. To use your example, this flip flop turns the investor into the house instead of the gambler, at least for awhile. The problem lies in waiting for the VIX to spike, with contango-related decay feeling a lot like the time decay one would get from holding a long VIX (or VXX) call option and losing money each day that the VIX did not spike.
The situation with VXX is different from that of ETFs, where the decay due to volatility compounding works in favor of the investor as long as ETF trends in the desired direction. It is only the choppy back and forth that causes losses. So a two day holding period is not a problem and a three day holding period is only a problem if the ETF reverses direction on the third day. Any subsequent losses incurred from the leveraged nature of the ETF are path dependent.
That being said, your main point is a good one: neither VXX nor leveraged ETFs are advisable vehicles for long-term buy and hold investors
Finally, I am still holding out hope that products like VQT might be able to move the discussion of VXX as a hedge into a more constructive light: vixandmore.blogspot.co...
-Bill
Hi J,
For holding periods of a few days, VXX is an adequate way to hedge against a volatility spike and/or a pullback in stocks. There is some problems with negative roll yield due to VIX futures contango, but this is minimized at the start of a new VIX expiration cycle, as is the case today.
For longer-term hedges, VIX futures and options are probably a better hedge than VXX or VXZ.
-Bill
Hi ehempel,
I will definitely post something in the not-too-distant future that provides a better historical perspective on the VIX Futures Contango Index and how it performed in various unusual market conditions.
Cheers,
-Bill
Thanks for the comments, AU. I appreciate and I will keep your promise in mind ;)
-Bill
A quick clarification: I have confirmed that the new weekly options are on VIX futures and that settlement for these weekly options will feature physical settlement - one futures contract for each expiring options contract.
Note that I have edited the original version of this post at VIX and More, but since Seeking Alpha has already picked it up by then, I am unable to change the content here.
Cheers,
-Bill
I also should have added the CFE (CBOE Futures Exchange) to the list of information sources. To find the relevant quotes, surf to
cfe.cboe.com/data/CFEM...
...and click on the "Price and Volume Detail" tab for the particulars.
Unfortunately, there is no direct link to that page.
Cheers,
-Bill
Hi nitroae23,
I am not aware of any service that provides a chart such as the one above that I created using Excel. As for VIX futures quotes, if you do not have an account with a futures broker, you can still get VIX futures quotes from some options brokers like optionsXpress. Also, there are some free web-based sources of VIX futures quotes. You might check out FutureSource.com for starters.
Cheers,
-Bill
Hi BT,
In my last conversation with TOS (about two weeks ago), they did not have VIX futures quotes available via their platform and were not sure about a timetable to add that feature. I'm not sure how high VIX futures are on their priority list, so I put in a feature request. You -- and anyone else who is interested -- might want to do the same and perhaps a small groundswell may speed up the process of making it happen.
Cheers,
-Bill
Thanks for all the comments everyone. OilFinder is correct, the chart was created by the Philly Fed and now is part of their two page summary of the August Business Outlook Survey PDF, which includes statistics, charts and commentary:
www.philadelphiafed.or...
Cheers,
-Bill
The screen shot comes from Livevol Pro. FYI, the company also has a Livevol free version (with only end of day data) if you wish to try out the product. You can find both at www.livevol.com/
Cheers,
-Bill
Excellent comments, dabigbear. Clearly VECO is still struggling to find any sort of technical floor here and the fundamentals are not coming to the rescue either.
As for Brett Favre, perhaps it's time I thought about retirement...
-Bill
We had a chance for awhile with those Case-Shiller housing MacroShares (UMM and DMM), but those never really caught on.
Perhaps further on down the road...
Excellent comments, all. I must confess that I have not made a habit of responding to the comment stream here at SA, but that is going to change going forward.
First, as Jeff noted and most understand, puts and covered calls are indeed synthetically equivalent. It appears, however, that executing two synthetically equivalent strategies -- particularly with puts on widely traded indices for which there is strong demand for puts as portfolio insurance -- can yield slightly different results over time. In aggregate, these results that have a tendency to favor selling puts.
If one looks at a graph of the performance of the PUT vs. the BXM, the divergence in returns starts to become noticeable starting in about 1999 and has persisted up to the present.
Regarding difference in performance of put-write vs. buy-write strategies, I think there are two likely reasons for the difference, which tend to favor the put approach:
1) slight differences in the skew that tend to price puts higher than calls, particularly during times of extreme market stress
2) as noted above, the lower transaction costs (commissions and slippage) associated with fewer transactions in a put-write vs. buy-write approach
For more on the skew differential, try this from Howard Simons:
www.thestreet.com/stor...
Also check out the comments from Jason Ungar of Ansbacher in this Steven Smith column for more information about the performance differential being tied to the skew: www.thestreet.com/prin...
Since this issue has received a fair amount of attention, I will probably post an follow-up on the blog shortly, with a graph of the PUT and BXM and encourage readers to comment on the differences in the results of the two strategies.
Cheers,
-Bill