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Daniel Sckolnik

 
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  • ETF Periscope: Volatility Hedge A Buy As Wall Street Soars [View article]
    Hedges are precisely that: risk protection. And, like car insurance, you are buying it as protection against some downside event.

    It is by nature a loosing trade, as one generally puts it on to protect the long bias of one's portfolio.

    There are other ways to perform risk management, such as going to cash or re-balancing amongst asset classes.

    In moderate markets, even diversification can serve, to a limited degree, as a way to hedge. However, in a sharp down market, diversification will not help you much. Correlation of equities, certainly, rises close to 100% in such circumstances. Just take a look at a comparative chart featuring indices for multiple asset classes during the 2008 crash, and see how they take a sharp dive off the cliff in almost perfect unison.

    Again, volatility (as an asset class) can provide a strong hedge against sharp market downturns.

    No question you pay for the protection!

    If you lose money on the hedge, you hope to offset it with upside gains. But, if your portfolio tanks because the market dives, the hedge, if positioned correctly, should help offset your losses.

    To be shocked that insurance costs money seems a bit naive. The idea is to shop around for the best insurance for your portfolio, which would be based on your own investment goals.

    VIX derivatives are a valuable tool in the investor/trader toolbox. Like any tool, you do need to learn how best to apply the tool to the job at hand.
    Jan 2 11:12 PM | 1 Like Like |Link to Comment
  • ETF Periscope: Volatility Hedge A Buy As Wall Street Soars [View article]
    Many good points made here in these comments regarding the limitations of VXX. In fact, when I usually write about the VXX, I include the comment that it is indeed a flawed vehicle. But that doesn't mean it still can't take you where you want to go.

    In any event, VXX is presented in this article as a volatility hedge, not a straight equity hedge. (Spy puts are indeed more effective in this regard, provided you know something about the Greeks. If not, do the homework.) The difference, primarily, is in how a VIX derivative tends to react in a sharply volatile market. The move in the derivative is generally amplified compared to a straight index hedge play, e.g., SPY.

    Granted, VXX is nowhere near as effective as a volatility hedge as would be a play on the VIX futures. But as pointed out in the article, many investors and infrequent traders don't use futures or options, and so they are left with the less effective ETFs, of which VXX, when used as a short-term vehicle, is one of the more widely used.

    And if you look at the chart of the VXX over the course of 2013, you may note that when the market took a sharp dive, VXX generally outperformed short plays on the major indices, all things being equal.

    Volatility as an asset class is a different beast than equities, and the point of the article is that, when the VIX dips down towards its recent, bottom range, it tends to bounce back up fairly soon. Buying a VIX derivative when it's near its recent lows, therefore, is merely buying insurance at a discount. In the event of a sharp market move, the flaws of the vehicle are outweighed by the insurance payout.

    The VXX just happens to not bounce as high as the vehicle it is derived from.
    Dec 26 11:13 PM | Likes Like |Link to Comment
  • ETF Periscope: Volatility Hedge A Buy As Wall Street Soars [View article]
    What Christopher said :)
    Dec 24 03:12 PM | Likes Like |Link to Comment
  • ETF Periscope: Volatility Hedge A Buy As Wall Street Soars [View article]
    Hi Rubenov,

    Keeping the VXX in your portfolio in perpetuity wasn't the suggestion made in my article. I did say that it "serves as a useful tool for shorter-term hedging."

    Big difference.

    If you buy it when it gets close to its annual lows, and sell it when you see a 10-15% short-term gain, which happens often, as a bounce off the lows is not uncommon, it accomplishes its role as a good short term hedge.

    "Free" insurance, to a certain degree.

    True, this requires paying a certain amount of close attention to the markets to be an effective strategy, but it is far from a day-trading situation.

    The current meme is that VXX, or the other VIX derivatives are flawed tools. No doubt they have their limitations, particularly the leveraged ETFs. But, like multiple hedging vehicles, VIX derivatives can indeed serve a purpose.

    One of the best ways to utilize volatility as an asset class, in terms of hedging, is to use the VIX futures, a far greater pure volatility play than that of the VIX-based ETFs.

    But most investors and casual traders don't utilize futures, though frequently due to a misunderstanding of the limitations of the vehicle rather than due to its faults.

    In lieu of using futures, however, buying a call option on VXX is another hedging strategy (the VIX tends to go up as the market goes down, and vice-versa). The leverage of options can make this hedging method an effective "bang -for-the-buck" play.

    Of course, you would need to know which option to utilize, and what to do in order to optimize the trade. There are a lot of educational resources out there that can help you gain an understanding of futures and options. Might be worth taking the time exploring, in order to add another tool to the trading toolbox.

    Daniel
    Dec 24 01:26 PM | Likes Like |Link to Comment
  • VIX Near Year's Low Makes It Cheap Insurance Against Volatility [View article]
    Mark,

    Indeed, utilizing Spy puts are a reasonably good hedging tactic, though the cost of premium can quickly offset the bottom-line effectiveness of that tool.

    Using VIX derivatives can be quite effective, especially if they are viewed through the prism of recognizing volatility as an asset class. Looking at the VIX in this manner provides one with a potential methodology to hedge through diversification of multiple asset-classes, including, but certainly not limited to, volatility as represented by VIX derivatives. (It goes without saying that not all VIX derivatives are created equal. Some are absolutely superior to others)

    As may be seen in the case of the last several days, acquiring the VIX when near its annual low provided an opportunity for both protecting one's portfolio at a relative discount as well as providing the opportunity to pocket a few dollars in profits.

    This sort of opportunity, which like all opportunities only is available at certain moments and conditions, is the result of the explosive nature inherent in the VIX, which is simply not available via SPY puts.

    No matter. The caveat for all discussion about hedges is the recognition that one size most assuredly doesn't fit all, and which ones work best for any given portfolio naturally varies widely and wildly.

    The more tools you have in your hedgebox the better. Assuming, of course, that you actually know when and how to use them.
    Aug 7 05:54 PM | Likes Like |Link to Comment
  • VIX Near Year's Low Makes It Cheap Insurance Against Volatility [View article]
    Yes, love the Abelson quote, but I think he wrote for a different time and set of circumstances.

    And certainly, in a number of ways, VXZ is a useful tool when applied to the appropriate job.

    However, it may reasonably be argued that, with the advent of technology impacting the market to a higher degree than during Alan's tenure over at Barron's, the potential for more volatile events are now in play, and require a less simplistic strategy than those employed during the late 20th century.

    Same thing holds true from the macroeconomic and geopolitical perspective.

    So while day-to-day tracking might be unnecessary if the hedge is appropriate to the portfolio, we are now in a time that it would be a high-risk endeavor to let the alpha dogs run, so to speak, without at least some semblance of a decent leash.
    Aug 6 02:15 PM | Likes Like |Link to Comment
  • VIX Near Year's Low Makes It Cheap Insurance Against Volatility [View article]
    Hi pbs,

    Agreed, that as a straight investment, VXX remains pretty miserable.

    It has a multitude of intrinsic problems, not least of which, as you note, is the “declining bias” which can be attributed to multiple factors such as contango, etc.

    That being said, it serves a definite purpose as a hedging vehicle for some investors, especially for those who don’t trade futures, which would be regarded as the more “pure play” on the VIX, as the VIX futures mirror the index much more closely and lack that same “declining bias”.

    If the VXX can be picked up at extreme low points such as the current level, it may be regarded as something akin to buying car insurance at a discount. No matter the cost, however, most will gripe, at least until the time they get rear-ended by a Mac truck.

    Regarding your appropriate reference to the difficulty of “timing those pops”, in the long run that issue can be addressed, to a certain degree, by taking profits off the table when the VXX does indeed pop, which can be 15-20% over a couple of days. At that point, as always, it is worth reassessing and redefining the appropriate amount of insurance one’s portfolio might require at that point in time.

    Finally, in terms of dealing with the VXX, or really, any VIX derivative that might best be categorized as a volatility asset-class vehicle, it might be of value to regard it from the paradigm of a trader rather than an investor. By doing so, being willing to make the appropriate adjustment becomes somewhat less of an issue.

    Because, as a straight investment, VXX is indeed a miserable one.

    Daniel
    Aug 6 01:41 PM | Likes Like |Link to Comment
  • VIX May Be Low, But High Volatility Continues To Lurk [View article]
    Thanks, Avi. Glad you found it of interest.
    May 6 11:45 PM | Likes Like |Link to Comment
  • VIX May Be Low, But High Volatility Continues To Lurk [View article]
    Hi Alan,

    The question that might be asked, then, is whether you bought the VXX as a long-term play because it was historically "cheap", or if you bought a VIX-based portfolio hedge that, coincidentally, happened to be purchased at its near all-time low.

    Unlike the majority of stocks or ETFs, VIX derivatives, such as VXX, might better be viewed as potentially effective short-term hedges, ones that are really only relative to the market environment they are found in at the time of purchase.

    Based on my own experience and observations, the VXX, in particular, usually proves to be a costly long-term market hedge. It simply isn't structured effectively for that purpose.
    May 6 08:49 PM | Likes Like |Link to Comment
  • Go Long Apple, Short The Eurozone [View article]
    Meant to say:

    BTW, I spend a fair amount of time over there, and it becomes clear upon even a cursory examination that the German government, which tries to make up for its past transgressions by being extremely generous to immigrants, who are there in ever-increasing numbers for precisely this reason, is experiencing a heavy economic burden from this largess, and it won't go away in the foreseeable future.
    Mar 26 02:40 PM | Likes Like |Link to Comment
  • Go Long Apple, Short The Eurozone [View article]
    Sure, 480 would mean that the gap created back at the end of February has been filled. But that's less than 4% off. Apple historically moves in larger segments then that, in either direction. Surprisingly, 500 has not served as a psychological barrier in the past. If it gets close to that point, I see a push up to 525.

    The catalyst? The next earnings report, probably in April, coupled with updates on the next product lauch, whatever they end up announcing.
    Mar 26 02:23 PM | Likes Like |Link to Comment
  • Go Long Apple, Short The Eurozone [View article]
    Btbriant,

    I appreciate you taking the time to read my article.

    Germany's GDP decreased by 0.6 percent for Q4 2012. March's IFO business climate index fell way short of consensus expectations. Not signs of an uptrending economy.

    Realize, too, that a key fundamental problem with the Eurozone, at least at this point, is that the initial situation where the Northern countries benefited by selling goods and services to their poorer neighbors on credit can no longer be recreated. Germany's economy isn't in a vacuum, and the burden of continually propping up the PIIGS will eventually catch up.

    Germany simply can't afford to let the inevitable contagion effect occur should either Cyprus, Portugal, etc leave the Eurozone. A large part of its economy is in the banking sector, obviously, and defaulting creditors such as the PIIGS would cause a strong shock to its system.

    BTW, I spend a fair amount of time over there, and it becomes clear upon even a cursory examination that the German government, which tries to make up for its past transgressions by being extremely generous to immigrants, who are there in ever-increasing numbers for precisely this reason, is becoming a heavy economic burden, and it won't go away in the foreseeable future.
    Mar 26 02:04 PM | Likes Like |Link to Comment
  • Go Long Apple, Short The Eurozone [View article]
    David Levner,

    As mentioned in my article, the EZU serves as a good proxy for the Eurozone equity market, and therefore would suffice as the vehicle for the short part of this pairs equation, as obvioulsy the European bourses would be directly impacted upon a negative regional event.

    Personally, I would use options for optimum leverage and minimum capital outlay, buying at-the-money puts two or three months out.
    Mar 25 11:15 PM | Likes Like |Link to Comment
  • The VIX As A Measure Of Uncertainty, Not Volatility [View article]
    Interesting article, Evan. One point to consider is that most volatility traders use the VIX as a hedge against sharp market movement, which is, at least practically speaking in terms of the market, pretty much the definition of volatility. So the question becomes one of how best to use this "fear gauge", regardless of whatever the pure definition of the VIX may be.

    As a hedge for volatility, whether anticipated or not, it retains good value, if used correctly. Insurance, plain and simple. It is wise to regard the VIX as, truly, its own beast.

    I wrote a bit about the real world application of the VIX in response to a comment in my SA article this morning, see link. Feel free to take a gander.

    http://seekingalpha.co...
    Mar 19 12:27 PM | Likes Like |Link to Comment
  • The Fed Won't Stop The Party Just Yet [View article]
    Actually, it's probably safe to say that you never need a good reason to expect trouble. It is the unexpected trouble that needs to be taken into consideration.

    A good example of the VXX as a hedge (in spite of its inherent limitations) may be found in the market's Cyprus response: as of this writing (mid-day), the VXX is up over 10% over the last two days. As a comparison, the VIX at the moment is up over 25%.
    Mar 19 12:06 PM | 1 Like Like |Link to Comment
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