Scott Murray

Vix and volatility etps
Scott Murray
VIX and Volatility ETPs
Contributor since: 2012
Company: Volatility Analytics
I meant near a 7 year low, sorry that I misspoke. I never mentioned historical vol. You should write a story on SA since you know a lot about vol. I'm not going to argue with you about things I didn't write about.
I frequently talk about short trades on my website, and in the newsletter, I just don't do it when the VIX is at a 7 year low.
I did not say that volatility options were insurance, I was referring to SPY options (see option chains above), and that you can better buy cheap volatility in them when the VIX is low and future volatility may be higher than historic volatility (like this week). I talk a lot about timing in my newsletter.
While a lot of these comments are true, I don't think that has anything to do with this particular article, nor do I suggest here buying VXX or their options. I go into extreme detail in my newsletter and on my site about the contango in these products.
VXX and related options do an enormous amount of volume even in this environment, so it is not going away.
There are ways to build a better ETF, and I may suggest some in a future article.
I will tackle a few of these points in my next article. I believe there are ways to time spikes off of low vol, within a certain range of time. Not tomorrow or next week. Thx for the comments.
I appreciate that, thanks.
Good thoughts, just keep in mind that the VIX has seasonality too, and Dec/Jan tends to be the lowest of the year.
Long term strategies, i.e. slow money, does phenomenally well in these products if you know how to structure them.
1. the roll always fluctuates, it all depends on the contango spread
2. only on trading days
3. see the ipath website, search vxx holdings
4. each opex cycle has different patterns and the market has a say too of course
5. part two is on my instablog because they didn't want to publish an options article
See my site for more info on this topic, there's a lot of posts there on vxx
Agreed, and I love the bearish call spread, but the sweet science here is knowing when to put on the bullish put spreads and the bearish calls spread.
Not the best time for bullish call spreads if you are looking past a few days, IMO.
There is only one real price target for VXX, and that is a fraction above zero over time. Although that path can be quite bumpy.
Yes, it is oversimplified. But your comment assumes a flat VIX, and that is a simplified assumption in and of itself, no?
I say "roughly" in the article, but I am working on a sensitivity model incorporating moves in each future price.
Yeah, your experience is not uncommon. The key is to not only know what the VIX represents, but also what the VXX and UVXY are currently holding. Lots of folks have taken big hits this spring and their supposed hedges didn't work.
Thanks for the kind comments.
Thanks, go to my blog for part 2 of this post.
Excellent case made for asymmetry in vol trades right now. I make the same case with a slightly different spin and trade structure:
http://bit.ly/1fIsf1z
The never buy calls rule is a good one for the most part, but there are occasions when the value is there. These days the front month futures are trading around 14, and the fund is still holding mostly April, so any kind of spike in vol and the calls will pay nicely.
Yet, with vol so low, I am preferring the index puts, on the IWM for example. High beta, low implied vol. These are far too cheap right now at around 13% IV, so that is where I am positioning. 2-300% possibilities in the May/June puts.
Thank you for the comments LC. You are right, I do sometimes hold too long.
I'm trying to sell the model, so don't expect to see that anytime soon.....
$4 is imminent with the APR futures trading 20+ cents higher. Get ready for the news stories.
VXX offers heavily traded options, so you can hedge/trade around a short position. XIV does not have traded options, and SVXY has an illiquid options market.
Further, look at the relative performance of the two notes. XIV is always a couple weeks away from potentially being cut in half, whereas a short position in vxx from the beginning of this year does not have that risk. So you are always walking on eggshells with XIV, but as VXX is 80% off for the year, a quadruple from here doesn't even get it back to break-even for the year. Then you can choose to add to short positions on VIX spikes.
I didn't think you were criticizing, I was just clarifying my position relative to your comments. As a perma-short in VXX, I don't think our views are really that different. In retrospect, the long volatility comparison was put in there to demonstrate the price differences in long vol trades (arbitragable probably), but it could easily have been taken as a recommendation. I will be clearer in future articles.
I put up some trades on VolatilityAnalytics.com if you are interested as well. You may find that just being short VXX and selling/buying puts using the VIX ranges as a guide might be a less complex but profitable setup. That is primarily what I've been doing for quite some time.
3rd Eye,
I was not suggesting that anyone use the VXX as a long hedge. I think the language "not as bad as it usually is", is not a glowing trade recommendation. The thrust of my story is more along the lines of those short VXX via long puts should use caution due to the current futures/spot relationship.
I haven't seen the futures trade at a discount to spot VIX yet this month, but yes, the normal premium in the front month has not been there. Today the front month premium is a mere .10 as of this writing.
This article was delayed two days in publication. The VXX was holding 80% front month at that point, today it is 14/20, 70% until it rolls this afternoon. It almost gets comical between 3:15 and 4 pm as you can literally see the VXX-IV change tick by tick. It is not holding 60% Jan at this point. This can be seen here: http://bit.ly/U4EOlF
One trade I've had on the past two weeks, is to be long Jan VXX $30 puts (I've had this leg on for over a month), and short weekly VXX puts at 29, 29.5 to try to hedge against a market move lower. Thus far, that has not worked, as the VIX has not made any significant move higher. As per my prior article, the odds of a VIX bottom for the year occurring in Dec are high, so a trip to 13 should not surprise anyone.
It's much easier to load up on 3x ETF options when the market breaks, than to get steamrolled by VIX futures day after day.
I wouldn't say likely, but more like a tail risk.
There are a lot of assumptions in there. Should I build a bunker, get some potato clocks, and load up on firearms? How will I be able to collect my CVOL profits when the global financial system crashes and I will need to trade bear skins for food?
The odds are pretty slim that the VIX will hit 60 in the next year. You are going to need the S&P earnings to fall from the current $100/share to $60, and the S&P 500 will have to fall from 1380 to 666. Meanwhile, CVOL has lost 95% this year.
There is significant time decay in the VIX futures, as they usually trade at a premium to the actual index volatility. As they get closer to the futures expiration date, they more closely represent the spot VIX. But the SPX options theoretically roll every day (1/20th or 1/25th of the VIN to the VIF depending on the OPEX cycle length) to the forward month for the VIX calculation, so time decay is really not a factor with those.
You can read all about how the VIX is constructed here:
http://bit.ly/oi5nOs
The negative number (VIF) next week only means that the front month takes more precedence for a week and if the next month is higher, then the VIX would not truly reflect anticipation of volatility. The main takeaway is that December is a low vol month due to seasonality, and that tends to hold the VIX down.
Market valuations in 2000 were at extreme levels. Not so today.
LEAP puts I mean. Kudos...
Long VXX puts on spikes have been an awesome strategy this year.