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Rock228
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I trade volatility ETPs, occasionally S&P 500 through SPY or UPRO and invest long term in Dividend Growth stocks with high dividend CAGR values. Individual stock picking is a waste of time to me unless the company pays out large and high growth dividends. I have developed a VIX Draw Cycle... More
  • How To Play The Debt Ceiling Debate (Debacle) 23 comments
    Oct 4, 2013 12:59 PM | about stocks: SVXY, XIV

    As congress moves closer to the abyss, I think it is time to figure out how to make maximum profit off of this chaos. It's the capitalist thing to do.

    First, if you have money in the stock market other than to short it, you are playing with fire. There is no reason to own the stock market while this chaos happens in Washington. Yes there is a chance of a small gain but the downside risk is much greater. I recommend 100% cash (I first recommended 100% cash starting August 7th with S&P 500 at 1690).

    So how do you play the Debt Ceiling? You wait. The pressure will grow and the VIX will go higher while the stock market goes lower. The closer they get to the Oct 17th expected default date, the higher the VIX will spike. Once congress finally raises the Debt Ceiling that is when the magic happens.

    Assuming a deal is struck approximately Oct 16th and as long as there are no other imminent unknowns (less than 2 weeks away) we can take a long position in the stock market - I use UPRO (3x long S&P 500). The hope is the budget can gets kicked to at least January 2014 to make this play even safer. The FOMC meeting on Oct 30th is not a concern, there is no way the Fed will cut QE after these games the GOP are playing not to mention the data does not support a taper either. Although the market could freak out a little around the October 30th FOMC meeting but that is your opportunity to go long even more if you are not already fully invested.

    Next you wait for the signals to go long your favorite inverse VIX ETP. My favorite is SVXY but most prefer XIV. I will post on this article and on my Stock Talk when the time is right to go long SVXY. Sometimes the timing coincides with the "end" of a manufactured crises (example - Fiscal Cliff) and sometimes it takes awhile after the crises to get the signals (example - Oct 2011 Debt Ceiling/Budget battle that took 45 days for VIX instruments to start consistently going down). Depending on how high the VIX is and how far the stock market has fallen will determine how much profit we can make on these trades. I will post expected returns when the time comes.

    The Budget issue, if not kicked down the road, could be a wrinkle in this strategy. We will have to evaluate as the time comes. Also, we may be able to buy some VXX puts on Oct 30th to get even more returns. That also depends on how far the Budget can gets kicked and how elevated the VIX is on that date. More to come as that date approaches.

    Quick recap: 100% cash, wait and watch the fireworks, Debt Ceiling/Budget battle concludes = go long UPRO and wait for signals to go long SVXY

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I have a small position in Oct 16th VIX call spread.

    Stocks: SVXY, XIV
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Comments (23)
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  • rodh7858
    , contributor
    Comments (138) | Send Message
     
    Nice article. I will look forward to ur stocktalks and/or updates.
    4 Oct 2013, 07:21 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Thanks rodh7858 - I am a weak writer and I tend to leave "obvious" things out that confuse people. I will be clear when I buy and will post.

     

    BTW - The market has not factored in the chance of a default yet. Not even a bit. The up and down this past week was purely on the Government shutdown and bad economic data. You will know when the market starts to factor in a default. The VIX will move to ~ 20 or higher and the market will begin to fall .5-1% per day. In 2011 this started 5 trading days before the "default" date. That would be Thursday of this week.

     

    The pricing of default could come earlier as people understand the mis-information CNN is putting out about what Boehner said about the debt ceiling. He did NOT say he would do a clean debt ceiling bill. Will not happen. He WILL get something on spending or he will let us default. He simply said that his caucus is so determined to get a huge pound of flesh from the D's (which won't happen) that even if he gets something on spending cuts, he will need lots of Democrats to even pass the bill because a vast majority of his party will NOT vote for the Debt ceiling even if they get some small cuts.....think about that....even if the R's get some cuts they are still willing to default. Boehner knows this for certain...once the market realizes this it will start browning its collective pants. And it should!
    5 Oct 2013, 12:14 PM Reply Like
  • VTH
    , contributor
    Comments (156) | Send Message
     
    Rock, Thanks. Will wait.
    7 Oct 2013, 05:26 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Two straight days of Backwardation (negative Contango) on the VIX. Today it is in steep backwardation. The last time this happened was the Debt Ceiling debacle of 2011. The market sold off almost 20% from its highs back then. Not saying it will fall that far but the VIX is saying the market is way to high and needs to come down.

     

    We are still 7 trading days until "default". The pressure will only build from here. There is no recent history that had the VIX rising this violently this early before the crisis. We can only rely on Fall 2011 for clues.

     

    XIV falling like a rock. Setting up for a massive recovery after Debt Deal is behind us. Stay patient and 100% cash.
    8 Oct 2013, 02:24 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Can't tell anyone to buy until there is a deal. Media hyped potential of a deal but Harry Reid along with many GOP Senators said no dice unless they open Government. House GOP refuses to open Government....Seems like we are exactly where we were 24 hours ago yet market spiked. Can we maintain this spike, possibly. But I just don't see it if there is no deal.

     

    I can't in good conscience tell anyone to buy when we could easily snap back lower tomorrow or Monday morning. Remember this is a marathon not a sprint. No prizes for getting in first. Patiently waiting for both sides to say Yes for a deal.
    10 Oct 2013, 09:09 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » So both sides agreed to pretend like they made progress when they really haven't just to save markets. Well, so far it has worked but for how long? If no deal by monday I think markets tumble...

     

    When asked about debt limit increase without Govt opening Harry Reid simply said "not gonna happen" and stormed away from the cameras. GOP still won't open Govt without conditions....Senate won't pass with conditions...how are we any closer to an agreement? They decided on the length - 6 weeks. WOW! What progress! LOL

     

    Obama is playing good cop to Reids bad cop. Just because Obama approves doesn't mean Senate will. Not buying until there is a deal agreed to.

     

    "CNN is also told that another House GOP leader made the point to the President that they needed to come out with some positive news or else the markets could tumble.

     

    Sources in both parties underscore that while the President did not agree to any specific conditions to fund and open the government, he is open to hearing GOP ideas."

     

    http://bit.ly/GTnXDb
    11 Oct 2013, 08:19 AM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Bought 1/3 of position in $SVXY. Senate close to a deal. House might try to stall and hold out until the last minute or I would be all in.

     

    I don't trust the GOP house. If things fall apart I can buy more lower.
    14 Oct 2013, 01:39 PM Reply Like
  • rodh7858
    , contributor
    Comments (138) | Send Message
     
    Good idea Rock. I might follow you into XIV tomorrow.
    15 Oct 2013, 05:14 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Deal looks done. Took 2/3 of my position in SVXY. Will buy the rest once Boehner says he will allow the vote and Cruz won't block..
    16 Oct 2013, 12:32 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Deal will be done. Boehner will allow vote, Senator Cruz will not block it. Bought the rest of my SVXY position. 100% of the position I want to own on SVXY.

     

    http://slate.me/1fCZcKK
    16 Oct 2013, 12:54 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Expect first sell signal to be hit today or tomorrow. Sell order for 1/3 SVXY at $120.50. Plan to sell all but 25% by Monday 11th. 15% gain at $120.50.
    6 Nov 2013, 01:21 PM Reply Like
  • thetortoise
    , contributor
    Comments (110) | Send Message
     
    Rock - are you selling in anticipation of the jobs report on Friday or are you seeing signs in this rally that just hasn't wanted to stop? Less than a month and I'm up 18.31% on XIV and 3.89% on ZIV (got into ZIV later than XIV). Great call on this one!
    6 Nov 2013, 01:44 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Congrats Tortoise, first of many big gains! Personally I don't play ZIV. I don't know the history behind the movement that far down the curve.....if I can't accurately model it then I stay away but don't let that discourage you from it.

     

    Not selling my longs in the S&P 500, selling some of my VIX ETP holdings only. I expect the market to grind higher but will post if I see an issue.

     

    Mr. Stephen Aniston helped me on this one big time. You gain on XIV when VIX falls AND when the current months price is lower than the previous months VIX price (roll yield).....when todays VIX is the same as last months VIX you lose the potential of ~ half of your price movement in XIV.

     

    Oct 15th was the last day VIX was extremely elevated. It moved to the 13's shortly after that. If todays price is 12-13 and last months is 12-13....you see the problem right? No roll yield. Selling 75% of SVXY by early next week.

     

    Now if we continue to drift lower into the 11's you can still make nice gains and ok gains if we just stay at 12-13 for another month, that is why I will keep 25% in SVXY until I see a big red sell signal or if I miss that one just pile back in after the next VIX spike.

     

    My napkin math says S&P 500 1761 - 1788 minimum before the rally stalls. But with no overhang (no QE taper) and rolling towards Christmas rally (market usually pops higher when we enter Q4 with a large gain) makes me think the sky is literally the limit....until Friday Dec 6th jobs number starts people thinking about Dec 18th Fed taper that won't happen.....so you sell Dec 5th and get back in Fed meeting day for the pop when they don't taper...ride the wave into the new year.

     

    A lot can change between now and then but that is the plan...for now.
    6 Nov 2013, 03:30 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Sold SVXY on Friday, all but 20%. Looking to go long UPRO. Will buy SVXY on the next VIX spike.
    9 Nov 2013, 03:37 PM Reply Like
  • thetortoise
    , contributor
    Comments (110) | Send Message
     
    Thank you for the detailed response on the 6th! I've held my long positions in VTI, my usual "I'm long the market" vehicle - interesting you are going long with UPRO! I have to admit I am intrigued by leveraged long and short products - particularly when a clear trend exists.

     

    I'm still long both $XIV and $ZIV though $ZIV is lagging even the market at this point due to an upward drift in the forward month. contracts. Frustrating considering the VIX is 12.38 as I type this. vixcentral.com shows the amount of contango on the futures curve of 11.88%! Deciding between that kind of yield and something like UPRO is an interesting "problem" to have coming into the end of the year. Will be watching closely the first week of December, and as you suggest, it does look like clear sailing into January from there.
    14 Nov 2013, 04:10 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Hi Tortoise. I like and use Vanguard, used to buy their Mutual Funds before I decided to take matters into my own hands.

     

    UPRO is a very powerful tool during QE. And if you are willing to go long an extremely leveraged fund like (XIV) then UPRO is a natural choice to go hand in hand with XIV. During a bull market it is a great one two punch. Janet Yellen will keep this party going for awhile longer.

     

    Steep contango is great but just be careful because it doesn't work out if the VIX rises especially when the 30 days prior VIX is basically at the same value as todays spot VIX...that starts Nov 18th. Any little rise in VIX will push the XIV lower at a much larger rate than usual. I would have most of my money out of XIV by Monday. Not sure about ZIV. Don't forget the VIX tends to spike here and there. The longest time between spikes this year was 22 trading days (we tied that today).

     

    I'm sticking with 20% XIV and 25% UPRO for the time being. I don't like being "all in" until there are pullbacks and my VIX indicators tell me screaming buys. Still running the numbers for Jobs number. December Fed meeting I will probably sell Friday at the close and buy back between 1 and 2 PM on day of Fed announcement (they won't taper).

     

    Lastly I found a nice end of year trade that has worked 5 years in a row. Will write it up as an Instablog once I get some time. Good luck!
    14 Nov 2013, 08:28 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Sold the last 20% of SVXY for 18.5% profit. Sold first 80% for 12% profit. Not bad for 1 month. Swapping from VIX ETPs into UPRO. There just isn't much upside compared to downside in SVXY and the like. Any spike in VIX will pull you down quickly. Best way to play the upside from here (until after the next VIX spike) is UPRO.

     

    Don't worry, there will be some VIX spike by Fed meeting on Dec 18th. Stay patient on the VIX until then.

     

    35% in UPRO now. Looking to add more on any weekness next week and might even add on strength. Not owning more than 50% UPRO going into Dec 6th Jobs number.
    15 Nov 2013, 04:05 PM Reply Like
  • thetortoise
    , contributor
    Comments (110) | Send Message
     
    Thanks for the excellent commentary Rock! It's so great to have some expert guidance as these gains seem unreal! I am more used to calling the gains from the last month an exceptional "year" under normal circumstances. I'm convinced on UPRO. Not "all in" convinced, but I'm certainly willing to take a bit of risk to enhance December and New Year's returns as long as this almost unbelievable trend holds. I still haven't sold my XIV though planning to scale down in the AM. The 22 days citation is interesting - these seem like unprecedented times with just a relentless uninterrupted climb in the market. I didn't see the 12.19 print on the VIX until after the market closed but that is incredibly low! I've been listening to the "sky is falling" prognostications for months now and we just keep going. A great time to be "all in" in equities and inverse volatility, and an even better time to follow the trend and ignore the noise.

     

    I will stay in front of the news on December 5th and December 18th - maybe set a calendar reminder. I'm so busy with work and school it's hard to do the research on what's coming up and the days slip away from me (though I do watch the tickers throughout the day just in case). Let's see what the week brings! Thanks again for sharing your insights, this is amazing stuff! Really looking forward to reading your next post on the year-end plan.
    17 Nov 2013, 10:02 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Thanks Tortoise. I make no promises, just letting you know what I do and why.

     

    The SVXY sale is a risk/reward thing. I just don't like holding VIX ETPs "forever" and like to play the cycles instead. If people make more in SVXY then UPRO by FOMC, I'm happy for them! Will write up end of year trade by this weekend.
    18 Nov 2013, 10:32 AM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Rethought my SVXY position. The short of it is I didn't realize how steep the contango would be between Dec to Jan VIX futures. But I should have known better with the budget deadline Jan 15th, many will worry about thus the steep contango. Whoops!

     

    Bought some SVXY this morning for the Fed minutes swoon. On the last 4 Fed minutes announcements the VIX has rolled over nicely and the market rallied between 1.2%-2.8% into Friday. Going to sell most of my SVXY Friday before the close and the rest the day before Thanksgiving (unless something funky happens). UPRO did well today too.

     

    I will try to update sooner next time, didn't have the time today.

     

    Potential next few trades. (in case I don't update LOL!)

     

    Buy SVXY Dec 5th (Thursday) about 15 minutes before the close (assuming the VIX has risen a bit during the week or is already at mid 13's or higher). Sell SVXY Dec 6th (Friday jobs number) before the close up until Dec 13th (wednesday).

     

    Buy SVXY Dec 18th before the Fed announcement. Sell from Friday Dec 20th until Dec 24th.

     

    Buy SVXY and UPRO Dec 31st and hold until January 10th or about 3% higher on S&P 500.

     

    Happy Hunting!
    21 Nov 2013, 08:15 PM Reply Like
  • thetortoise
    , contributor
    Comments (110) | Send Message
     
    Thanks Rock! There are no promises in the market - only probabilities. It's rare to see someone back up their ideas with real trades and I admire this! You have no responsibility for those who lose money following your advice. There are just no guarantees - though the VIX moves in response to government and Fed actions is about as close as I have seen in my investing history.

     

    Right now I am quite unfortunately all in cash. I am moving my ROTH and rollover IRAs to a brokerage that allows limited margin. I really need to get more nimble than the 3 day settled trade "free-riding" rules allow. Previously I have been entering positions knowing I am married to them for at least 3 days - a scary proposition for leveraged positions in XIV and UPRO for example. I was hoping we would trend sideways while the funds are in transit, and I'm really sad to have missed out on the last couple of days in XIV and UPRO. Though the move should make up for the losses the first time I need to make a quick reversal in a position. At any rate I'll be ready to go for the upcoming potential trades! Thanks again!
    24 Nov 2013, 10:03 PM Reply Like
  • Rock228
    , contributor
    Comments (989) | Send Message
     
    Author’s reply » Tortoise - Thanks for the kind words. I've not had a problem with the limits in trading IRA positions. Most of my trades last at least 3 days. Just have to remember to close out other positions 1-2 days before you start a new trade. Good luck and hope it helps you stay even more nimble. Happy Thanksgiving!
    28 Nov 2013, 09:51 PM Reply Like
  • thetortoise
    , contributor
    Comments (110) | Send Message
     
    Thanks Rock! Hope you had a Happy Thanksgiving as well! Hard to believe it's already time to go back to work and see what the week brings in the market.

     

    All the funds are loaded and ready to go in new accounts. I didn't even know about the 3 days rule until I started trading volatility ETFs and the warning came up when I got cold feet one of my first trades.

     

    Happy to be in cash as I'm not sure what the week will bring. Friday was a crazy day with the crater into the close. Will be watching the markets closely and definitely not rushing in.
    2 Dec 2013, 12:30 AM Reply Like
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