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Dr. Thomas Carr
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Dr. Thomas K. Carr (aka “Dr Stoxx”) is the Founder of DrStoxx.com (formerly “Befriend the Trend Trading”). He holds M.Phil. and D.Phil. degrees from the University of Oxford. For 16 years he was a tenured professor and department chair. He currently is a fulltime trader, market analyst, trading... More
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  • Profiting From The VIX Fear Index! 2 comments
    Aug 8, 2014 2:07 PM | about stocks: VXX, XIV, VIXY, TVIX

    The VIX Index tracks the premium prices of near-term out of the money put and call options on the S&P500 Index. As the implied volatility of these options rises, and thus the premium options traders are willing to pay for these "insurance" positions, so does VIX. As I.V. falls, VIX falls. Thus the VIX gives us a very good read on the near-term forward expectation of the markets regarding volatility. A rising VIX means a rising expectancy of higher volatility, which normally means falling stock prices.

    The VIX has been rising sharply for several weeks now on fears of Russia's invasion of the Ukraine, on increasing tension in Iraq and Gaza, and on the prospect of rising interest rates here at home. But it may have reached an unsustainable height. If so, this provides us with a very profitable opportunity. One can trade the VIX Index directly through the use of options on the index. I prefer to use one of two ETF's: VXX which tracks the Index, and XIV which is the inverse of the index.

    I'm currently Watching this sharp wedge on VXX develop. I have a few VXX puts on, but may add more into the close of today's trading if this downside pressure (a falling VIX) holds into the close. If traders are willing to release the pressure valve on the "fear index" into the weekend, that tells me that whatever news may come on the geopolitical front, the markets are not that worried about it. I also just bought some XIV (options are not available on this ETF) which does the same thing as my VXX puts. VIX is likely to trade sideways or down, but upside is limited from here.

    Please click on the chart below. You will see VXX trading somewhere around $34.50 per share at the time of this writing. It has run up into a falling major moving average and has stalled up upward progress. The wedge rises at about a 60-degree angle; anything over 45-degrees is unsustainable. RSI is overbought and showing some weakening. This may develop into a bull flag breakout, in which case a prudent stop is just over the recent range of intraday highs if you are short shares of VXX (or under recent lows if you buy XIV). $30.00 is a reasonable near-term target, for about 15% gain in shares of VXX/XIV, or 60%+ on VXX puts.

    Happy trading!

    vxx

    Disclosure: The author is long XIV.

    Stocks: VXX, XIV, VIXY, TVIX
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Comments (2)
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  • Welt
    , contributor
    Comments (252) | Send Message
     
    I too recently bought XIV with the expectation that the VIX would not hold its currently "somewhat elevated" levels. Today's trading has me up one minute and down the next which is normal volatility. I will say I am a bit skeptical that XIV will bounce back with ferocity in the near term due to seasonal factors as well as all of the geopolitical issues. Do you share the same skepticism?

     

    I am thinking that if there is indeed a bounce-back in the market that I would be wise to take profits a little bit early this time rather than waiting for new market highs. What are you thoughts?

     

    Welt

     

    Edit: I also think the final hour of trading will be telling and fully expect the VIX to rise during that period. If the VIX continues to fall during the final hour (which I don't expect) that will likely make me more comfortable. Basically, I don't think there are many who want to be long this market over the weekend...guess we will see.
    8 Aug 2014, 02:59 PM Reply Like
  • Dr. Thomas Carr
    , contributor
    Comments (101) | Send Message
     
    Author’s reply » Don't wait for new highs. A 10% move at max....TC
    8 Aug 2014, 05:23 PM Reply Like
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