An Almost Risk-Free Way For Annual Return Of 50%+ [View article]
Max drawdown is a measure from peak to trough. Therefore, Blix is correct that this strategy is much riskier than you are implying.
When I wrote an article about a similar strategy back in 2009, I was contacted by hedge fund performing this. They said the biggest problem that you run into is the shares are really difficult and expensive to borrow. I don't think they are still doing the strategy anymore either.
iPath S&P 500 VIX: Time To Prepare For Bearish Trading [View article]
I guess I'm responding to "This risk is minimal at this point in time". This seems very subjective.
I would agree with your strategy if you led with the cap and didn't suggest that a uncapped strategy is prudent.
Also, I'm not sure how your losses are only limited to 15% when VXX went up 343% in Fall 2008. You are long one call and short two calls, so the one call has unlimited risk.
iPath S&P 500 VIX: Time To Prepare For Bearish Trading [View article]
This strategy will get slaughtered during epic rises in VXX, which occur more frequently than you think (%s represent trough to peak over the same period of trading days in which you are selling these calls): * Summer 2006 (61%) * Spring 2007 (40%) * Summer 2007 (98%) * Winter 2007 (46%) * Fall 2008 (343%) * Summer 2010 (86%) * Spring 2011 (36%) * Fall 2011 (182%)
Selling VXX calls before the Fiscal Cliff seems like risk seeking behavior.
This strategy wouldn't trigger the day trading rules because the n-count of trades are lower. If you'd like to see how I manage longer term positions in volatility, check out this article. http://bit.ly/JsqsLI
I started using this technique beginning in 2012 when I got burned from backwardation during the craziness of August and September 2011.
This strategy has thus far turned out successfully. Based on the current rolling costs of VIX futures, there is even a "slimmer chance" than before that VXX will fall below $11 by June. I say "slimmer chance" in quotes because I thought there was a 0% chance of this happening when I wrote this article. I had to make unrealistic modeling assumptions to just get VXX slightly below $11.
IVOP is an inverse ETN to VXX. However, it does not attempt to capture the daily price movements, but the change from an initial price.
When IVOP was priced at $20 during their offering, VXX was worth ~$41. As VXX declines from $42, the % decline is applied in a positive way to IVOP. So today VXX closed at $18.45, making the NAV of IVOP worth: 1) ($18.45 / $41) - 1 = -55% 2) (1 + 55%) * 20 = $31
IVOP's NAV will change less than VXX movements when it is above $20 and change more than VXX movements when it is below $20. IVOP also has an automatic redemption clause at $10. Therefore, I only typically hold IVOP if it is in the high 20s or more.
I like to have a position in IVOP as well as VXX. Because over the long-run, the rolling costs of VXX will likely keep IVOP going higher but IVOP has much less variance than VXX when it is in the high 20s. Also, holding IVOP doesn't pose a threat to ever getting margin called either like a short VXX position would.
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
Hey you've got a really great blog! I've ran across your site before. There are not a whole lot of people out there that really understand the mechanics behind VXX and VIX futures.
My long-term positions are primarily dictated by the rolling costs of the futures. I am the type of investor that likes to be earning a yield vs. play the VIX future price changes in relation to its mean reverting level. I find that if you follow the roll costs, then they are also decent predictors of future price changes as well.
I'm assuming that your decision to close the shorts was in response to the VIX futures' relation to their historical mean-reverting level. I would agree that price risk is elevated, but rolling costs are still attractive for a short position.
The following article does a decent job explaining my views on profiting from rolling costs:
My 34 day trading period also has the constraint that VIX futures are at or below their current level. Otherwise you could point to December 8, 2011 when VXX dropped ~40% during that time. But the VIX futures started above 30. When you say VXX, you are really saying VIX futures.
I can illustrate this through an fictitious example for clarity. I say Future Y has not historically fallen below 15. Future Y is currently at 16. Therefore, I say it is unlikely to experience of decline of more than 1. Then you say well when Future Y started at 25, it fell 10.
My point is that I realize it has fallen by the amount you state, but it is not comparing the same thing.
When I said VIX short-term index I referring to the futures index or VXX. I did not want to say VXX explicitly because it did not exist prior to 2009, so to be exact I was referencing the index which VXX derives its value from. Probably should have wrote "future" in there for clarity. Thanks for catching :)
The current level of futures has a lot to do with the level of VXX on 12/20/10 because it is more representative of what declines can be seen given the current level of futures. For instance, if VIX futures were are 50 (current month) and 60 (next month), then we know that the price decline that could occur is very large in a short amount of time. Future prices and VXX could theoretically fall >70% in the matter of a day.
However, since VIX futures have had recent trouble falling below 15.55, if you start at VIX future prices of 18, then you will have much difficulty seeing drastic declines. So my analysis looked at what were the biggest declines in the past when starting at the current level of VIX future prices (current and next month prices). What I found was that much of the declines were from rolling costs, but the rolling costs were in an extremely high period (much higher than the current level).
Therefore, I concluded that it was unlikely for VXX to fall below $11 by June 15, 2012.
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
I think of contango and rolling costs as two separate mechanisms of return. Theoretically, the current month future price and the next month future price could both be the same price (let's say 20). If the VIX index is at 15, and both the current month future and next month future converges to 15 tomorrow, all of this gain is from convergence not rolling costs.
Obviously this is a very stylized example for illustrative purposes, but that I how I think about returns from VXX.
An Almost Risk-Free Way For Annual Return Of 50%+ [View article]
When I wrote an article about a similar strategy back in 2009, I was contacted by hedge fund performing this. They said the biggest problem that you run into is the shares are really difficult and expensive to borrow. I don't think they are still doing the strategy anymore either.
iPath S&P 500 VIX: Time To Prepare For Bearish Trading [View article]
I would agree with your strategy if you led with the cap and didn't suggest that a uncapped strategy is prudent.
Also, I'm not sure how your losses are only limited to 15% when VXX went up 343% in Fall 2008. You are long one call and short two calls, so the one call has unlimited risk.
iPath S&P 500 VIX: Time To Prepare For Bearish Trading [View article]
* Summer 2006 (61%)
* Spring 2007 (40%)
* Summer 2007 (98%)
* Winter 2007 (46%)
* Fall 2008 (343%)
* Summer 2010 (86%)
* Spring 2011 (36%)
* Fall 2011 (182%)
Selling VXX calls before the Fiscal Cliff seems like risk seeking behavior.
Predicting VXX Intraday Price Movements [View article]
I started using this technique beginning in 2012 when I got burned from backwardation during the craziness of August and September 2011.
Mispricing In VXX Put Options [View article]
Mispricing In VXX Put Options [View article]
When IVOP was priced at $20 during their offering, VXX was worth ~$41. As VXX declines from $42, the % decline is applied in a positive way to IVOP. So today VXX closed at $18.45, making the NAV of IVOP worth:
1) ($18.45 / $41) - 1 = -55%
2) (1 + 55%) * 20 = $31
IVOP's NAV will change less than VXX movements when it is above $20 and change more than VXX movements when it is below $20. IVOP also has an automatic redemption clause at $10. Therefore, I only typically hold IVOP if it is in the high 20s or more.
I like to have a position in IVOP as well as VXX. Because over the long-run, the rolling costs of VXX will likely keep IVOP going higher but IVOP has much less variance than VXX when it is in the high 20s. Also, holding IVOP doesn't pose a threat to ever getting margin called either like a short VXX position would.
Predicting VXX Intraday Price Movements [View article]
Predicting VXX Intraday Price Movements [View article]
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
I'll keep an eye out for future articles on your site. It was great hearing from you.
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
My long-term positions are primarily dictated by the rolling costs of the futures. I am the type of investor that likes to be earning a yield vs. play the VIX future price changes in relation to its mean reverting level. I find that if you follow the roll costs, then they are also decent predictors of future price changes as well.
I'm assuming that your decision to close the shorts was in response to the VIX futures' relation to their historical mean-reverting level. I would agree that price risk is elevated, but rolling costs are still attractive for a short position.
The following article does a decent job explaining my views on profiting from rolling costs:
http://seekingalpha.co...
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
Mispricing In VXX Put Options [View article]
I can illustrate this through an fictitious example for clarity. I say Future Y has not historically fallen below 15. Future Y is currently at 16. Therefore, I say it is unlikely to experience of decline of more than 1. Then you say well when Future Y started at 25, it fell 10.
My point is that I realize it has fallen by the amount you state, but it is not comparing the same thing.
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
When I said VIX short-term index I referring to the futures index or VXX. I did not want to say VXX explicitly because it did not exist prior to 2009, so to be exact I was referencing the index which VXX derives its value from. Probably should have wrote "future" in there for clarity. Thanks for catching :)
The current level of futures has a lot to do with the level of VXX on 12/20/10 because it is more representative of what declines can be seen given the current level of futures. For instance, if VIX futures were are 50 (current month) and 60 (next month), then we know that the price decline that could occur is very large in a short amount of time. Future prices and VXX could theoretically fall >70% in the matter of a day.
However, since VIX futures have had recent trouble falling below 15.55, if you start at VIX future prices of 18, then you will have much difficulty seeing drastic declines. So my analysis looked at what were the biggest declines in the past when starting at the current level of VIX future prices (current and next month prices). What I found was that much of the declines were from rolling costs, but the rolling costs were in an extremely high period (much higher than the current level).
Therefore, I concluded that it was unlikely for VXX to fall below $11 by June 15, 2012.
Contango And Backwardation's Relationship To VIX Futures Convergence [View article]
Obviously this is a very stylized example for illustrative purposes, but that I how I think about returns from VXX.