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  • VIX Short-Term Futures ETNs Present Rare Opportunities [View article]
    "VXX is currently holding almost 50% of each month's future. This is important because the more expensive June future will not rise or fall as fast as the front month. So, if the VXX is heavily back-loaded or front-loaded with a majority of one month's future, it is far more susceptible to big moves up or down."

    Isn't the whole point of the rolling structure of the short term vol futures products (like VXX) is that they attempt to price at about the same point into the future, ie a month out, by keeping an ever shifting blend of front month and second month contracts that mimic a 30 day future expectation (assuming linearity between the M1 and M2 contracts?)

    Do you think that there is a non-linearity in the volatility of the futures such that you'd expect one of the following to be more volatile:
    100% in M1 with 30 days to expiry
    50% in M1 with 15 days to expiry and 50% in M2 with 45 days to expiry
    3% in M1 with 1 day to expiry and 97% in M2 with 29 days to expiry
    May 12 11:27 PM | Likes Like |Link to Comment
  • VIX Short-Term Futures ETNs Present Rare Opportunities [View article]
    "The best way to bet on VIX is to get long or short VIX futures" and "But just avoid time valued vehicles"

    seems like a contradiction to me. If futures aren't time valued, what is?
    May 12 11:18 PM | Likes Like |Link to Comment
  • The Silly Chile Trade Is Back And Bigger Than Ever [View article]
    The market spoke today... @MLP Trader, that's a very interesting hypothesis about the major shareholder fund manager propping up the position but I'd expect that he/she wouldn't have let it go on the final trading day of the month when assets are getting marked...
    Jan 31 05:29 PM | Likes Like |Link to Comment
  • Unraveling The VXX Roll Yield Riddle [View article]
    Isn't the issuer of an ETN sort of de facto short in their own product (unless they hedge long)?
    May 23 10:20 AM | Likes Like |Link to Comment
  • Unraveling The VXX Roll Yield Riddle [View article]
    Fair enough. However, since VIX futures do not have an investible spot product like almost all other futures contracts do, the wikipedia definition of roll yield can't be applied here. V1 is the closest thing to spot that is investible, so considering the convergence between V2 and V1 as the roll yield is a reasonable approximation.

    Overall, I'm not really sure the practical implication of your derivation on how one should view positions in VXX/XIV. Can you put a finer point on it for the denser of us readers?

    I think about this fundamentally as a question of whether one believes that the spot (or nearest term future) is generally accurate and the longer dated futures will converge to it, or whether the longer dated futures are accurately priced and the spot will, in the future, converge to them. For instance, if S=15, V1=18, and V2=20, will S converge to 18 during the next month (and will V1 converge to 20) or will V1 converge to 15 and V2 converge to 18.

    My core belief is that, for both human behavioral reasons and for supply/demand reasons, the nearest term prices (incl spot) are most accurately priced and the longer term ones are more distorted.

    Call me an empiricist rather than a theoretician but this seems to be right more often than not.
    May 12 01:14 PM | Likes Like |Link to Comment
  • Unraveling The VXX Roll Yield Riddle [View article]
    An inverse vol product - leveraged or otherwise - is helped, not hurt, by contango. Going short a product that's helped by contango would mean that you're hurt by contango.
    May 12 12:57 PM | Likes Like |Link to Comment
  • How Much Would You Pay To Avoid Volatility? [View instapost]
    Nicely written. @Chris I like the way you frame this as an exchange of expectancy vs. volatility. That's not a totally ridiculous proposition as it's the basis for an enormous insurance industry where you take a negative expectancy in return for reduced volatility.

    Of course, there's well priced insurance and ripoff insurance. I'd say this is more like "trip cancellation insurance" or Best Buy's extended warranties. Clearly negative expectancy, and not protecting against financial ruin like auto liability or health insurance does.

    Maybe these products have really created a marketplace exchange for expected return vs. risk. I know which end I'll be on
    May 10 02:28 PM | 1 Like Like |Link to Comment
  • Unraveling The VXX Roll Yield Riddle [View article]
    Thoughtful article, nice to see someone taking a new approach to a well worn issue.

    Something that I think gets lost by many of the above comments is the difference between VIX and VIX futures. Spot VIX isn't tradeable and the front month contract does not necessarily converge to spot VIX on expiration day (the formulas are slightly different, games get played by individuals with futures positions).

    Also, there are supply/demand issues in VIX futures, especially the front and 2nd month contracts, that often get overlooked. The underlying shift in basis exposure (what I'd call "roll" but the author clearly does not) equals about 20% of daily futures volume for first and second month VIX futures contracts. Meaning, if you knew that there was a HUGE trader who planned to sell the front month every day and buy the 2nd month every day - forever - you would not be surprised to learn that the front month was consistently underpriced relative to second month contracts. Simple microeconomics.

    Of course, these are ETNs so they don't necessarily actually take the underlying positions, but it's a safe bet that they're hedging off their exposure to some degree, or through derivatives of some sort, and the net effect is the same.

    My point is that the bigger these ETNs become the larger the propensity for the contango that destroys them. Poetic.
    May 10 02:18 PM | 5 Likes Like |Link to Comment
  • Beware The Sweet Siren Song Of XIV [View article]
    Well written article, but like Hossii and others I'm happy to take the other side of the author's trade. Since this is an intelligent discussion I'll add another angle to it:

    Despite XIV's increasing AUM, it is still dwarfed by the long or 2x long ST Vol index (e.g., VXX, TVIX, etc...) AUM. By my calcs using the following list there is about $2B greater interest in the long side of ST VIX index products (I'm doubling the AUM of the 2x products here) than the short ST VIX side (i.e., XIV).

    While these ETNs are not ETFs, and therefore aren't necessarily backed by actual futures positions, I think it's likely that the sponsors are hedging out much of their (net) risk with futures positions. No one has the stomach to be naked short $2B in ST VIX index exposure...

    Why this matters is because that has actually become a significant fraction of futures contract open interest (about 20% last time I checked) and this means there is a structural bias towards contango. If a sponsor is hedging out their ST VIX Index exposure they're constantly selling front month contracts and buying 2nd month contracts. This rolling is, in my opinion, actually creating the bias towards contango that is killing the VXX longs and benefiting the XIV longs.

    Crushing days like 4/15 will happen but casinos can take losses at the roulette table as well. Doesn't mean it's a bad bet
    Apr 16 02:32 PM | 2 Likes Like |Link to Comment
  • Short TVIX: The Ultimate VIX Contango Trade [View article]
    Off the cuff, I'd say short SPY. Previously I found a 4:1 hedge ratio with VXX and therefore 8:1 with TVIX worked fairly well. This of course depends on the belief that vol goes up only when markets go down which isn't exactly the case.

    A more (theoretically) correct hedge would be long puts on SPY, since those would also have a direct component of volatility in their price
    Feb 5 10:11 AM | Likes Like |Link to Comment
  • Short TVIX: The Ultimate VIX Contango Trade [View article]
    Interactive Brokers. They'll pass along the short borrow fee (typically 3-6% annualized in this symbol), but it's typically available to short sell and they'll definitely allow it.

    I think most brokers (ETrade, Fidelity, etc...) don't enable shorting on symbols with non-trivial borrow fees, since they don't pass along the borrow fee and thus they end up eating the fee themselves. Gives them a disincentive to allow you to short. This is just my suspicion though
    Dec 1 03:28 PM | Likes Like |Link to Comment
  • Reaves Utility Income - Great Fund Now On Sale At $1 Off [View article]
    I don't think you're correct about the 5% off of the lesser of the NAV or Market Price. I think its =min(5% off of NAV, market price) not 0.95 * min(NAV, market price).

    Important clarification because what that means (to me) is that the price will likely be driven down to a slight discount to NAV in the next few days
    Jul 26 11:16 AM | 1 Like Like |Link to Comment
  • VXX: Near Term Bull, Long-Term Bear [View article]
    @deweyj - there are two kinds of "decay" that could be referred to with regard to VXX and the like.

    First is the contango -> roll cost decay process, and for that one, XIV does benefit from the same pattern that penalizes VXX in times of contango (which is 80% of the time).

    The second is the decay process that results from noise in the daily prices during a sideways trend. If VXX goes from $10 to $11 (+10% move) and back to $10 (-9% move), the XIV will go from $10 to $9 to $9.81 - not back to $10. This is a property that's much discussed with the 2X and 3X ETFs like FAS FAZ. This is the asymmetry between XIV and VXX.

    Of course, if VXX goes down by 10% per day for 15 days (0.9^15) that'd be an 80% loss, while XIV would go up 10% per day for 15 days, a 315% gain. So, when things trade in a choppy sideways fashion, XIV will do worse than a short position of VXX but in a prolonged move, XIV will do much better
    Jun 28 12:22 PM | Likes Like |Link to Comment
  • Short TVIX: The Ultimate VIX Contango Trade [View article]
    Worked really nicely actually. As of the last (after hours) trade, TVIX up 7.7% but the underlying was up ~19%. Where did that extra 11% come from? Premium came out of TVIX in a huge way.

    Reread the article. I do not claim to have a point of view on how the market or the vol futures will move, just that this is a very skewed risk/REWARD trade.
    Jun 21 06:28 PM | 1 Like Like |Link to Comment
  • Short TVIX: The Ultimate VIX Contango Trade [View article]
    Yes, that's a flattening of the curve and will lessen the "roll cost" paid by longs of TVIX. Still 1.70 is sizeable, but it's less than 2.25 for sure.

    I don't think it's proper to refer to the +1.60 vs +1.05 as "backwardation" since that usually refers to the shape of the curve itself, not the rate of change in the curve. Flattening, but still in contango.

    The other "contango" that you could consider is that between the spot VIX and the front month (20.08 +2.84 vs 23.30 +2.85). This isn't quite the same thing since you can't trade spot VIX and since there's not perfect convergence between the future and the spot on settlement day for a variety of very esoteric reasons, but directionally it is worth considering
    Jun 21 05:17 PM | Likes Like |Link to Comment