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Rock228
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I trade volatility ETPs (SVXY, XIV, UVXY), S&P 500 through SPY, UPRO, SPXU, 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. Macro mixed with Volatility... More
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VIX CONTANGO
  • VIX TRADING RULES And Other Good Info 102 comments
    Jan 13, 2014 8:59 PM | about stocks: SPY, SVXY, XIV, UPRO

    First some stats and other random thoughts that I think are useful. After looking at the 2013 data I found the following:

    Average price of the VIX when we hit a market pullback - 12.36.

    Average market bottom for VIX - 17.82.

    All decent pullbacks came after 8 or more trading days VIX closing in the 12's (except for artificial pullback - Debt ceiling/government shutdown - they don't count). We hit day 7 on Friday 1/10/14. The longest time staying in the 12's area was 12 days but both of those were early last year. As the year moved on we stayed low on the VIX for less time in the cycle.

    Last 3 VIX cycles VIX in the 12's before market pullback - 9 Days, 8 Days and 10 Days. Market was very complacent on Friday 1/10/14. Between the low VIX and the jobs number I saw red and sold everything. 100% cash. Good timing after looking at Mondays pullback.

    Last year had 7 VIX cycles top to bottom.

    If VIX is in the 11's even intraday - sell. You are picking up pennies in front of a train. It could work out but why take that chance?

    If VIX rises to 15 - Sell. During QE it has always gone higher when rising to 15.

    If you buy (NYSEARCA:SVXY) while VIX is in backwardation you have a high chance of buying close to or at the bottom. The longest VIX stayed in backwardation in 2013 was 3 days. This is not the case outside of QE and since we have had no decent pullbacks since 2011 - be wary of Summer 2011 case where it went back and forth out of backwardation before plunging 70% in a month.

    (NASDAQ:XIV) (SVXY) vs (NYSEARCA:UPRO) same VIX cycle top and bottom dates. IE - you bought and sold XIV and UPRO as a pair. XIV outperformed UPRO by a mile 6 out of 7 cycles.
    Bigger risk = bigger rewards

    XIV drawdowns - -9.2% -20.5% -21.9% -23.9% -19.0% -21.5% -6.6%

    UPRO drawdowns- -6.2% -8.1% -8.9% -16.3% -12.4% -11.2% -2.9%

    XIV Pops - 17.0% 33.0% 19.8% 59.1% 24.3% 46.2% 13.4%

    UPRO Pops - 7.3% 22.0% 26.6% 27.9% 17.8% 29.3% 9.7%

    PULLBACKS SINCE 2004 (Courtesy of Stephen Aniston)

    Drawdown SPY

    Vix Rise

    Avg
    Duration

    Avg XIV Drawdown

    #

             

    5%

    7.43

    24

    -23.15

    6

             

    7%

    8.29

    28

    -22.69

    8

             

    10%

    10.2

    57

    -31.97

    3

             

    20%

    31.21

    78

    -62.94

    2

             

    50%

    64.56

    351

    -86.56

    1

    The take away is during QE buying when you see a 5% pullback is a good bet and buying when you see a 7% pullback is a great bet. Outside of QE buying 10% pullback is good, buying 20% pullback is great and if you see a 50% pullback - sell everything you own and go triple long the market! :)

    Here are the rules I have hanging above my desk. I read them every chance I get to remind myself not to fall into some of the common investment traps. It especially helps on days when I am 100% cash and the market is soaring higher.

    VIX TRADING RULES:

    1. BE PATIENT! You can catch the next train.
    2. DATA DEPENDANT. Let the VIX signals make the decisions for you
    3. DON'T OVER THINK IT. Stick with the plan, don't chase returns
    4. KNOW YOUR GOAL. Always remember where you want to go
    5. DON'T GET GREEDY. Don't extend past the signals…they limit your risk.
    6. COMPOUNDING IS MY FRIEND! Even the small gains add up
    7. MINIMIZE THE CHANCE OF LOSSES Play the cycles and historical macro events only

    That last one I have ignored more than once and paid for it. New Years resolution 2014 - I am going to take my own advice from now on LOL!

    Next post I plan to do a 2013 scorecard showing how I did and how I could have done using the VIX Cycle method 100% of the time.

    Later I plan to do a more detailed article on 2012 and 2013 VIX Cycles and what to expect for 2014. Also, a more detailed article on Market Pullbacks since 2004 and how to time entries into and out of stocks for all market types.

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

    Additional disclosure: 100% cash as of 1/10/14

    Stocks: SPY, SVXY, XIV, UPRO
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Comments (102)
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  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    Vix Trading rule #8 - when Rock is in cash, probably better think twice about staying in the market!

     

    Great post Rock and congratulations on being in cash today. Not losing money is 90% as good as making money in my book, and I'm pleased to say I am almost entirely in cash. All weekend long I talked myself into getting back in the market because the fundamentals just weren't that bad (so I thought)... My plan today was to go long and wait for the inevitable rally. Thankfully I did not go long, and even better, as far as I got this morning was adding some February VIX calls when the spot rate was in the high 11's. I was basically trying to position for the budget fight, and figure out how VIX options work, but I managed to get in with some dumb luck before the market dive.

     

    Lots of great data to analyze here. I appreciate the trading rules as well. My worst is rule #1 - when the train is leaving the station and I'm not on it, I can't help but feel I've missed the boat, so tempting to chase. My second worst is #5 - Don't get greedy - I want to squeeze every last penny of that XIV trade - but I need to realize the cost in terms of risk goes up with every tick.

     

    I have disciplines to work on in 2014 for sure. The signals should really help keep perspective on the right course of action. I keep telling myself we are only 15 days into 2014 - plenty of time and opportunities to compound our returns. I need to read this about ten more times - looking forward to you planned posts as well. Thanks Rock!
    13 Jan 2014, 10:53 PM Reply Like
  • Seppo Sahrakorpi
    , contributor
    Comments (2146) | Send Message
     
    Good stuff @rock. Thanks a lot. The 'sell if intraday below 12' rule would have saved me today from the incoming train :) Well, now I have to wait for more contango, and it looks like SVXY started correcting late in the day already...
    13 Jan 2014, 11:01 PM Reply Like
  • Seppo Sahrakorpi
    , contributor
    Comments (2146) | Send Message
     
    It is Miracle, the train, it stopped, it is backing up now!
    14 Jan 2014, 10:14 AM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    it did indeed. I sold my 3 calls bought late yesterday at

     

    10:12:52 2014 Sell 3 SVXY Jan 18 '14 $135 @ $5.1

     

    so 100% up overnight, so just $750. They are at $6.1 now, but it was a limit order called away when I was on the school run! How much those kids cost me eh? better to sell too early and keep profit i think, esp on options expiring this friday...
    14 Jan 2014, 11:30 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    great article Rock...so I assume you will be waiting to see where the VIX goes (to 15 or not) before going long the market again?
    13 Jan 2014, 11:17 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    this is the best corner of S.A. at the moment.
    "You are picking up pennies in front of a train." I love that. You should sell that line to Buffett, and Mary could put it in one of her books.

     

    Great article...again. I will continue to follow. Thanks.
    14 Jan 2014, 07:02 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    You've never heard that phrase before? It was originally along the lines of "pennies in front of a steamroller."
    14 Jan 2014, 11:07 AM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Rock,
    Another fantastic article! Thanks for sharing your research. I always look forward to reading your posts.
    14 Jan 2014, 08:22 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Rock:

     

    Thank you very much for sharing (all of us appreciate it).

     

    My risk tolerance is probably higher than yours, so your last point I don't totally agree with.

     

    While I agree that the BEST time to invest in SVXY is after these crisis, waiting for these crisis deprive you of taking advantage of the monthly contango of 8-10% per month, when VIX is flat, falling (even better), or slightly rising (will curtail some of your gain, but you will still have a gain for the month if VIX does not rise more than the 8% for the month).

     

    I guess you can chalk this up to knowing my goals.
    14 Jan 2014, 09:20 AM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » RJL - You are welcome for the shared info.

     

    I am confused, are you saying my rule #7 you don't agree with?

     

    I do that to minimize risk of a massive move that kills my holdings. If I just hold all the time my risk increases for that happening. I analyzed the data going all the way back to Black monday and found that there were almost always precursors to those movements. If you sell early you almost never get hit by them.

     

    Add in my cycle signals and it lowers the risk potential a lot lower. In fact I even would have missed April 15th terror attack - having sold March 14th and bought back April 19th buying back in 8% lower than I sold.

     

    If I can beat the buy and hold SVXY guy AND lower my risk of black swans why wouldn't you do it? If you bought and held SVXY last year - 106% gain. Awesome! My VIX cycle trading return was higher than that. I will show you the results in detail as soon as I find the time to finish writing it up. My cycle return would have outperformed buy and hold every year I tested since 2009 until now and most year more than double the return and with ZERO big drawdowns. In fact years like 2011 are when it really shows it strips. Buy and hold - 45%. My signals + 101% (48% gain before summer swoon and 36% gain after).
    14 Jan 2014, 11:02 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Rock, can you explain what the signal was that made you sell on March 14th? Very prescient timing. Very much looking forward to your article (and hoping not many people read them!!!)
    14 Jan 2014, 11:46 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Rock:

     

    Yes, I disagree with rule number 7

     

    This rule is stating that you play SVXY ONLY at crisis times and the rest of the time you are in cash.

     

    The problem with this rule as I see it, is that you are missing on monthly contango (8-10%).

     

    Now, I am not advising on just holding for the entire year, but have a trading plan where you will hold to capture the monthly contango and be ready to capture the big macro events.

     

    An astute investor sees the big macro events coming (debt limit could be a possibility, Summer of 2011 was a definite- European crisis, the effect on the market and the VIX futures), cashes out a week or two before hand, waits for a VIX spike (if given the opportunity to go in big), or waits for it to pass and goes in and captures the contango.

     

    For the last several years while QE was in force, I have been using the following (at normal times- macro events coming up I close out two weeks before):

     

    Spot VIX under 13- sell
    Spot VIX 13-15- hold (capture contango)
    Spot VIX over 15- buy aggressively

     

    I have been able to more than double the buy and hold strategy also.

     

    When QE was not in force, these ranges were increased to 14 on the sell, 14-16 on hold and 17 and above as a buy.
    15 Jan 2014, 06:58 AM Reply Like
  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    RJL - I read your strategy as being roughly the same as Rock's. Selling under 13 because the risk/reward just isn't there. Both playing the cycles as described and taking extra precautions around macro events. Probably will be easier to determine after the next post where 2013 details are laid out. If I understand what you are saying you would not advocate holding XIV this week?

     

    Black swan risk really does scare me with this instrument. Not having capital deployed is a potential dodged bullet and I factor that risk adjustment pretty heavily.
    15 Jan 2014, 01:46 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    The key differences between our strategies is that I would still hold XIV/SVXY (to capture contango) when the spot VIX is in the middle range and where I do not anticipate a large spike in the VIX.

     

    You are correct that I am currently not holding XIV/SVXY (I did a one day trade on close of Monday that I sold on Tuesday mid afternoon- profit over $4.50 per share, because I thought the market was oversold, the VIX spiked and the difference from SVXY high to closing price was $7 a share).
    15 Jan 2014, 02:44 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » RJL - Read it again. "Play the cycles and historical macro events only" Play the cycles....AND...macro events. Buy into weakness and sell into strength...rinse and repeat. We are saying the same thing.

     

    Those are good targets. Congrats on the returns! I use a few other indicators so if the pivot point on the VIX moves higher (like in non-QE years) I can still time it as close as possible. Keep me informed of your buy timing and I will do the same.

     

    IDK - It's proprietary :) In that case you had massive Contango (16-17%), 5 days of VIX in the 12's or lower and the VIX closed at 11.3. 11.03 is the 52 week low. It was a no brainer for me. At that point you were relying only on roll yield with the risk of VIX moving higher and killing your profit. Take profit when you can. I have other indicators and those all showed sell as well.

     

    Another random reason - Fed meeting the next week March 19th-20th...so you sell by the Friday (14th was a Wednesday) before a Fed meeting and buy back just before the announcement. Other random reason Monday and Tuesday tend to be the worst days for SVXY so i wanted to sell before then. I think I have listed about 6 reasons to sell.
    15 Jan 2014, 05:38 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Thanks Rock,

     

    I did not realize that your macro events were similar to my holding range (to capture contango). I agree about rinse and repeat strategy (that is where my ranges come into play) and am willing to hold them for contango if I can not rinse and repeat.

     

    I also adjust those targets depending upon macro events (QE, stock market, GDP, interest rates, politicians, overseas....)

     

    I will keep you informed on any trades I do on SVXY and I look forward to your postings also. As I mentioned, I was 100% out of SVXY from Christmas Eve until Monday close, where I bought a 20% position in SVXY and sold the next day. Ended up with a over a $4.50 gain per share.

     

    I am currently out of SVXY (do have some June UVXY puts- strike price $11 that I have bought in the last few months and am willing to ride these until May), but do own UPRO and UXI.
    15 Jan 2014, 06:38 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » Thanks all for the nice words. I might not have called the top on this one but I am still not convinced we will go much higher from here. 8 Days and counting in the 12's, very low 12's no less. Market doesn't stay complacent forever. Still holding cash looking for next SVXY entrance.

     

    Congrats James on the mini options trade. I want to trade options more but I can't find the time. If/when I quit my job and do trading full time I will have time. That's the goal anyways. Not far from it so trying to stay very very patient....but I couldn't pass up the VIX Feb 13-15 Call spread. 4% of my holdings in it.

     

    IDK - this cycle is long in the tooth. I am waiting for the next VIX spike to play again. Until then I watch the stats and look for signals.

     

    James again - Thanks for the compliment. I hope I help people out to at least show you what I am doing and why. I did not create this trading style. Just standing on the shoulders of giants. Too bad Macro Investor hasn't posted since August. He is very good at forecasting and pretty good at timing them as well. Others have taught me so much, I just want to help some others. It helps to bouce the ideas out there. I missed the Debt ceiling timing by a few days and others on here were telling me (practically begging me) to buy and I should have listened to them. I still made a killing though. I get as lot back from you guys as well so thanks for writing!
    14 Jan 2014, 10:43 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Rock, would you still recommend going long the Feb 13-15 vertical call spread? Also, the VIX cycles you refer to, is that the information summarized in the table above?
    14 Jan 2014, 11:47 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    thanks Rock. I only hope I have not come in on the final few opportunities on this trade. Could the VIX move to a new cycle, for example, and 12 no longer be the floor?
    I'm excited to move into a new area of trading to compliment the rest of the portfolio, and this seems to favour the small investor.
    It we be great if we all can all get wealthy eventually, or indeed just continue to profit doing something which is much more stimulating and fun than nearly anything else out there!

     

    Thanks again.
    15 Jan 2014, 08:22 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Rock, I just went long the Feb 13-15 VIX call spread. VIX under $12, i just couldn't pass up the opportunity. I calculate that the VIX would have to hit around close to $17 in order for me to have gained more if I had just gone long the $13 calls alone.
    15 Jan 2014, 11:18 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Rock, i think it would help to clarify to everyone here that you don't intend to hold the spread to expiration (I certainly don't, as I expect the VIX to rise around the time of the fight and immediately drop after the debt ceiling debates get settled down).
    15 Jan 2014, 01:27 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » James - There is plenty of cycle left to the low teens on the VIX. The pivot point rises when there is no QE (not always though). Same cycles just harder to catch but we can get there. The only time we are in trouble is when term structure changes like in late 2006 and 2007....BUT the good news is that indicates we are near a total stock market top and the collapse is near. At that time the play becomes LONG VXX or UVXY (2x long) vice SVXY/XIV - because backwardation takes hold more than contango. Harder to do but again, not impossible. So unless we think the bust is at our door step...keep playing in this sandbox.

     

    IDK - Yes I still recommend the 13-15 VIX call spread. And yes I intend to sell the spread long before expiration. My hope is to sell it around Jan 29th (Fed Meeting). VIX at 14 would be a 30% profit. Then buy it back after the VIX goes back down to the 12's by Friday Jan 31st and be ready for the next spike on the Feb 7th Debt ceiling. Sell on the debt ceiling spike. Potential on the two trades to make a double. A guy can hope!

     

    And it is hard to tell if you would make more or not on the straight calls because of the timing of the sales - not holding to expiration. The premium falls off quick on calls so you need the VIX to move much higher than our Call spread as time moves on. I just like the capped risk and breaking even at 13.72. Can't beat that! You might make a double or triple on the call...or lose it all. I might make a double and low risk of losing it all. I like those odds better!
    15 Jan 2014, 05:55 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    thanks Rock. This is inspiring, and a great addition to my portfolio. This might end up replacing a lot of it as well, if I can prove it to myself over the coming months.
    Oh, btw, I used to work for big I.T. we all got kicked out after the Y2K and dot com bubble shambles. I've been renovating properties, and doing my own thing ever since, including trading for the past 14 months. So there is no pay check to get in the way for me!
    15 Jan 2014, 07:48 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Rock, I hope we get a VIX at 15 for the Fed meeting. Quick question though, selling it by the Fed meeting, then re-entering right before debt ceiling, do you think that is too aggressive/greedy of a move (I'm thinking about your rule #5 lol)? What if the VIX doesn't drop after Fed meeting, going into the budget debates?

     

    And yes, agreed on the calls. I ran the equation and we'd need a VIX of at least 16.75+ for the calls to have a higher return than the max return for the spread. I like the downside protection from the spread as well.
    16 Jan 2014, 12:04 AM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Rock,
    Funny you mentioned doing this full time. I've been contemplating the same. My salary looks smaller and smaller compared to the gains that are possible by trading volatility. But, it's hard to give up the security of a regular paycheck and subsidized health insurance. The slow start to this year has delayed my decision. I'm sure we will get rolling soon.
    15 Jan 2014, 07:35 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    William & Rock:

     

    I am in the same situation as both of you (contemplating doing this full time and leaving my job).

     

    However, the salary I am making is a very good one, which allows me to contribute $23,000 per year into the company's 401(k) Plan. The 401k Plan has a directed brokerage option (which I use to buy and sell SVXY). The only thing it does not have are options.

     

    I have a large IRA from a prior company that I worked for 15 years, and this is the account that I use for option trading.

     

    Because of the self directed brokerage account in my current Employer's job and the large IRA I have, it allows me to maintain my current job (receive large salary and benefits), while giving me some freedom of trading.
    15 Jan 2014, 09:15 AM Reply Like
  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    Hey everyone – let’s please not leave me working two jobs while you go off to buy Ferraris with “Contango” license plates ok? :) Congratulations though to get where you are (and are going). Really, the magic of compounding, it doesn’t take many years with 100% gains to change your life. And I don’t "need" to work two jobs, the second one is just the real world contango-juice to make it easier to max-out contributions on both mine and my wife’s retirement accounts and IRA’s each year while also paying for school and keeping ahead instead of grinding along. I probably have ten years to go before I can leave the job market, but will happily bail out before then if the volatility trade holds up for a few more years.

     

    I have thought about asking if we could get a self-directed brokerage option at my current employer. I am happy we have a Roth-401k at least - crazy volatility trades with a tax free payout is almost too good to be true.
    15 Jan 2014, 03:35 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    My account is not set up to do call spreads (yet), so I bought Feb $13 calls when the vix was under 12. I can see that the 13/15 call spread trade is more attractive up to VIX 15. If the vix spikes over 15.5 then I will be better off if I sell above 15.5. I like the spread trade better because it takes the guessing out of when to cash out. I did use an automated limit sell order on half the calls to automate the process somewhat. Comments are welcome......
    15 Jan 2014, 04:26 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    you don't have to wait till VIX 15 or above. But VIX 15 or above is where the max profit is.
    15 Jan 2014, 04:41 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » RJL, William - To top off my family issues and work, my goal of doing this full time is also holding me back. My risk appetite has gone down considerably because I can see the finish line. Conservatively I could be there by this summer. So I am being extra patient. BTW - Today is day 10 of VIX in the 12's. 12 days was longest last year.

     

    Tortoise - You can get there in time. I have been saving up my whole life to get here. But you can get there quicker than me knowing how to trade VIX. I am taking a huge risk (assuming I do quit my job) where I assume I will continue to get large gains moving foward every single year....scary but you only live once and it is my dream. I also have extra motivation - my job has become a grind. I don't enjoy it much at all so I want to do what I like - managing money. Oh and my largest fund - 401k - only has a few index funds to buy and limits trades. Terrible! I want control of my money so I have to quit :)

     

    BTW- I was wrong about selling on Friday. Oh well. There will be a pullback eventually.
    15 Jan 2014, 06:12 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    OK guys, be patient with me here please...I have a dumb question.

     

    So, the $13 $15 Feb call spread.
    when I try this on my account I get an alert blocking me
    Could you tell me how to do this?
    Do I buy open $13 Feb and sell close $15 Feb calls?

     

    Thanks in advance
    16 Jan 2014, 04:32 AM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    update, I need to increase my broker options trading level to 3 from 2.
    for now I'll just buy the call.
    thanks again.
    16 Jan 2014, 04:55 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    James:

     

    You can not sell to close the Feb 15s because you do not own them

     

    You must buy to open the Feb 13's and SELL to open the Feb 15's

     

    Hope this helps.
    16 Jan 2014, 06:21 AM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    thanks RLJ, thanks for your patience. I realise this was a kinder garden type question!

     

    I will try that
    16 Jan 2014, 08:13 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    James:

     

    No problem, that is how we all learn!!

     

    Just glad I can help!!!
    16 Jan 2014, 08:25 AM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    @RJL, waiting for my account upgrade response, so I just bought 5 VIX feb $13 contracts at 1.60.
    I find, and this only applies to someone with my short attention span, putting some money in the game concentrates the mind and helps me learn!
    16 Jan 2014, 10:15 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    James:

     

    That applies to almost all of us (myself included)!!!

     

    Good luck.
    16 Jan 2014, 10:21 AM Reply Like
  • windwine
    , contributor
    Comments (80) | Send Message
     
    Hi Rock,

     

    A good article and congratulations on your fantastic results. It is really hard to beat the underlying index during a good year by timing the market and you did it! Your range is working perfectly recently but how do you think about 2007 and from the end of 2008 to April 2009?

     

    From the end of 2008 to ~March/31/2009, the term structure was flirting with contango and backwardation while the VIX was in the 40s for most of the time. Judging from your cycle descriptions or RJL's approach I guess we would have a buy signal(I am simply guessing and I might totally be wrong. :-) )? If we bought SVXY right at 12/31/2008 (QE1 was already in place) we would lose ~25% by holding to 03/31/2009 or we may get in and out of the market frequently during that period as we want to capture the end of backwardation and score a big gain. SVXY did take off later in 2009 but I think the loss from trying to pick up the bottom may harm investor's confidence and make them reluctant to commit to SVXY.

     

    2007 and Q1 of 2009 have always puzzled me and I do want to hear some suggestions from you guys. Thank you and may the $$ be with you.
    15 Jan 2014, 09:37 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    If you read Rock's other blog, you will see that both of us state that you have to be aware of the macro events and invest/ trade accordingly. My trading range right now is with QE and a normal market (down no more than 10% for the year and positive up 20%)

     

    In 2008-2009, you had a Great Depression and the market was dropping hard and fast. When you see a market like that, the appropriate play would be to move 100% into cash. and wait for things to stabilize. At that time you can see where the VIX was averaging out and if you wanted to play, wait for a spike after that.

     

    Looking back at the VIX, you can see that the VIX was averaging out in the mid 50's around October 6-8, so you would wait for a spike at least 10 points higher than that (and then let it settle down back to the mid 50's).

     

    Once you see the big macro event was finished, you would go hands over heel back into the long SVXY (or short UVXY positions for a long term trade).

     

    Looking back, the trades would have been:

     

    10/6-10/8- average VIX mid 50's
    10/10/08- VIX jumps to 69.95 (buy XIV/SVXY)
    10/13/08- VIX down to 54.99 (sell)
    10/15/08- VIX at 69.25 (buy)
    10/20/08- VIX at 52.97 (sell)
    10/22/08- VIX at 69.65 (BUY)
    11/3/08- VIX at 53.68 (sell)
    11/6/08- VIX at 63.68 (buy)
    11/7/08- VIX at 56.10 (sell)

     

    This is what we call Rinse and Repeat. A lot of money could have been made during this period.

     

    Hope this helps.

     

    Hope this helps.
    15 Jan 2014, 11:17 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Ralph, great post. However, isn't there hindsight bias? It would be hard to buy and sell those temporary VIX tops/bottoms since at the time, you wouldn't know if it would go higher (recall VIX was up to 80 after Lehman!).
    16 Jan 2014, 12:08 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Yes, I admit it is somewhat hindsight bias

     

    But, the idea is to see that:
    1. Macro event has changed
    2. Get out of the way of the large drop
    3. Wait for things to settle down
    4. Look for a trading pattern

     

    If someone was watching closely, they could have identified this pattern on 10/13 at the earliest or by 10/20 at the latest.

     

    During this time, even if I identified this pattern, I probably would have done the first trade at about 25% of my normal trade (because of the great depression we were in) and then the second trade at least at 50% (confidence gain from first trade)

     

    Good trading.
    16 Jan 2014, 06:26 AM Reply Like
  • windwine
    , contributor
    Comments (80) | Send Message
     
    High Ralph,

     

    Thank you for your response. I agree with you on the Macro event argument but it is not easy to decide when a macro event is over. Otherwise we are all billionaires now. I briefly checked your proposed entry/exit and I found out the following results:

     

    Assuming you enter and exit on the closing price as that is the only price I could get.

     

    I guess you would like to buy svxy on 10/09 when vix jumped from 57 to 63 instead of 10/10 and saw a ~5% drop on 10/10 then pondering what to do next.

     

    For the 10/15 entry and 10/20 exit you will lose ~5% despite the VIX dropped from 69 to 53 and you were down by >10% on 10/17.

     

    For the 10/22 entry and 11/03 exit you will lose ~10%.

     

    For the 11/06 entry and 11/07 exit you will gain ~5%.

     

    So there is not a ton of money to earn for those trades. And since QE1 was not in effect yet I guess most of us would not get into the market for the trades mentioned above.

     

    BTW, when you mentioned "2. Get out of the way of the large drop" did you mean a large drop in VIX or a large drop in S&P 500? I think sometimes the large drop of VIX could bring a lot of momentum to SVXY and if at a appropriate level it might be a good entry signal.
    16 Jan 2014, 10:16 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Windwime:

     

    I am not sure what you are testing, since both XIV and SVXY did not exist during this period (I am assuming you are pulling up futures prices in your calculation).

     

    Besides looking at the drop in the VIX, you would also have to look at whether we were in contango or backwardation.

     

    I am assuming that the period you are looking at, we were in backwardation. If this was the case, the rule of thumb I use is to not invest in XIV/ SVXY until we move into contango.

     

    As far as getting out of the way on a large drop- I was clearly mentioning the drop in the S & P.
    16 Jan 2014, 10:29 AM Reply Like
  • windwine
    , contributor
    Comments (80) | Send Message
     
    Thanks for your reply and I was using the back simulated XIV/SVXY price during that time. During that time we were in backwardation and definitely I do not want to get in.

     

    Indeed I thought you were getting out of a big VIX drop just to realize your profit as that is more like the contrarian thinking many people are proposing when trading VIX. I agree with the bailout on a big drop approach as the risk is too large.

     

    Still, Rock and Ralph, any suggestion on how to trade the 2007 situation with a not so bad S&P 500 and VIX term structure but a slowly bleeding SVXY? Thanks.
    16 Jan 2014, 11:46 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    The problem with 2007 was that overall, we had neither contango or backwardation (see attached article)

     

    http://seekingalpha.co...

     

    I would have traded volatility in 2007 only when we were in contango and if I saw a trading range that was established.

     

    Absent that, I would have stayed away and look for other opportunities.

     

    This is why I am not in SVXY right now (disclosure- I do have some UVXY June 11 puts that I had previously bought over the last 2 months and plan on keeping until expiration).

     

    You have to look for the opportunities to get into volatility. If the opportunity is not there, stay in cash or find something else that is working.
    16 Jan 2014, 12:01 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Everyone:

     

    Alot is being mentioned about macro events and the need to adjust your trading strategies.

     

    We all know that the last few years, we all made lots of money due to contango. However, this situation is not always the case.

     

    Attached is a great article from what some people say is the most knowledgeable person on volatility.

     

    http://seekingalpha.co...

     

    You can see the sloping backwardation curve for 2008, the 2009 curve and see the last few years.

     

    This is key to understand where we are (and are going) in this volatility curve.

     

    Hope this helps

     

    Ralph
    16 Jan 2014, 09:08 AM Reply Like
  • Seppo Sahrakorpi
    , contributor
    Comments (2146) | Send Message
     
    Excellent, thank you. Looks like contango is the norm, but there are some outlier years. On average over a long time period one has contango. Of course the sample size is too small.

     

    Once we enter backwardation, the main benefit of SVXY trading is gone IMO, and one needs to stay out as long as that lasts...or be pretty sure that the trades one does are solid.

     

    Once we are in backwardation, does VXX show 'contango' in a sense of constantly higher pulling VXX SP? I would assume so? If so, I assume one could play VXX during those times, i.e. buy VXX when VIX is down and sell VXX when VIX is up within a range and enjoy the benefits of 'VXX contango' securing one's back a bit...
    16 Jan 2014, 09:22 AM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » RJL and Wind - Wind is right on those trade dates, I have slightly different values but here is what I get. 7.6%, -4.8%, -12.7%, 2.6%. So that is a net loss. We were in steep backwardation that whole time. If you bought VXX that first day and sold that last day you would have made 58% profit. So the answer is when the bust is happening and we keep going into backwardation - buy VXX or UVXY and sell when come out of backwardation. Rinse and repeat :) The same exact concept of the VIX cycle for contango except for backwardation.

     

    But yes the hard (nearly impossible) times are 2007 and late 2006.
    Note to self (some day....) write a detailed article showing how to trade 2007 (maybe late 2006 as well). My signals would have made you decent money that year, but you would have had losses on trades as well. Tough year.

     

    The good news is my signals don't rely only on a buy here, sell here VIX, or pivot points. I have all of the above plus a few special indicators I don't discuss on here. When you put all of that together I can trade every market we have had since 2004 in XIV or VXX. I can't guarantee awesome returns and the curve could do something funky we don't have data for....but I remain confident as I delve into the data more and more that I can find decent entry and exit points.

     

    The other good news of 2007 is when we get a flat curve like that...we know the ultimate top in the market cycle is coming real quick!! - Top was Oct 8th 2007. I need more study but if you look at Oct 18th 2007 and beyond you see many instances where VIX drops but backwardation gets worse......that might be an indicator of the crash. Just throwing stuff on the wall to see what sticks!

     

    So flat VIX, choppy markets, long bull market run up in stocks + golden nugget again from Stephen Aniston (misquoting slightly)- "booms and busts tend to pivot in March and October". It is a very true statement. Bust started Oct 2007 and new boom started March 2009.

     

    Add up all of those little nuggets and even if you can't deftly manuever a 2007 VIX market.....you can get ready to make mucho dinero off of the coming collapse! Figure out your short plan in the mean time. Make lemonade out of lemons!

     

    I have 6 articles that I want to write but can't find the time right now. Almost done the Scoreboard. 2012/2013 VIX cycles and timing market pullbacks are the two I will work on after Scoreboard.
    17 Jan 2014, 06:02 PM Reply Like
  • windwine
    , contributor
    Comments (80) | Send Message
     
    Excellent job, Rock. If you can get a decent profit in 2007 by trading SVXY no matter how small it is you have my full respect :-) I have tried various versions based on some "sound" ideas for the whole time frame and I only got 1 making 11% in 2007 for several different algorithms (that is the reason I did not post any of my algo here since I am not satisfied with them). Really looking forward to your articles.
    17 Jan 2014, 06:45 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » Wind/RJL - I will look over that 2008ish time frame when I get a chance and get back to you. I have XIV (created) data going back to 2004.

     

    All - In the meantime I wanted to share something Stephen Aniston sent to me - First off, forget the "whatever happens in January is the direction of the market". Complete BS. I looked at the last 13 years (last two boom/bust cycles) and found 5 of 13 January's were WRONG at predicting. 6 of 13 if you count 2011 where January was up but the market was exactly flat. That is like flipping a coin!! Some indicator?! If it doesn't work the last 10-15 years then it is garbage. Times are different now, I don't care if it worked in 1955! That being said...

     

    From the Traders Almanac
    If January is a down month early it usually takes off by the 14th trading day (Jan 22nd this year). If we end up down in January it precedes a bear market, 10% correction or a flat year 100% of the time.

     

    Think about that. Huge indicator. I checked those same last 13 years and sure enough every time the Almanac was right! Tuck that golden nugget away in your knowledge cap.

     

    1848.36 is the number to beat by months end. I think we move strongly in one direction or the other sometime next week. January rarely is a small mover month. There are a few 1.4-1.7% January's but the average move from 0 is 3.5% for the last 13 years! So get ready either way. I sit in cash waiting.

     

    BTW - Potential ominous sign - today is day 11 of VIX in the 12's. 12 days was the longest last year...about this time of year.
    17 Jan 2014, 04:20 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Rock, I presume you are still long the Feb 13/15 VIX call spreads?
    17 Jan 2014, 04:24 PM Reply Like
  • VTH
    , contributor
    Comments (615) | Send Message
     
    I don't like the earnings coming out, either just in-line or misses. But we have more earning releases next week. I can make a call better end of next week. I agree, VIX in 12's is so much over bought. But the bond yield has come down so much 2.83 from 3.0, that means we don't have enough strength in the economy!!
    17 Jan 2014, 05:52 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » I fear / hope :) that the earnings keep coming out so so, that data is mixed and then the Fed tapers another $10B. I think the market will freak out and we sell off. Like you say VTH the bond market is telling one story, the Fed is telling another. Both can't be right and I think (not 100% sure) that the market at large now trusts the bond market more than the Fed.

     

    Yes - Still own the call spread until Fed meeting week for sure. I will post when I sell.
    17 Jan 2014, 05:56 PM Reply Like
  • VTH
    , contributor
    Comments (615) | Send Message
     
    I think bond market discounted for low jobs number. But I think FED will continue with another 10B taper as they think QE value is declining. I am hoping vix level elevates towards end of next week. For last time around, its started raising from Nov end to Dec starting, but its unbelievably quite now.
    17 Jan 2014, 07:05 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    OK, I am disobeying the rules here, but I've placed a limit $1.80 order for 8 jan 31 $67 calls.
    will report back on progress.
    order filled..
    now...next task is to give your excellent advice the proper attention and study it deserves!
    24 Jan 2014, 10:31 AM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    bought 5 more at $1.55
    24 Jan 2014, 12:02 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Which trading vehicle did you buy the $67 calls on? I hope not the VIX....
    24 Jan 2014, 12:15 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » James - It may work out (I hope it does) but I would not do 1 week trades. My calcs show 2 and 3 week out (exactly 10 or 15 trading days) are the optimum risk/reward buys from the BOTTOM. So I wait until I have a defined bottom. At 11:30 the Vratio was below 1 which if hit at the close has a high accuracy of indicating a bottom.....outside of macro events. We have two macro events next week but if things keep it up today I will be taking a 25% position at the close.

     

    Options Strategy I use - 2 weeks out buy $1 out of the money and 3 weeks out buy $2 out of the money but only if the ETF has fallen at least 10% from its recent highs. 10% is my MINIMUM fall before I look to trade options. I am not an expert on options - far from it - so take it for what its worth. I have had success following the above strategy, every time.
    24 Jan 2014, 12:23 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    oh it was the $SVXY
    sorry for omitting that bit of detail!
    24 Jan 2014, 12:36 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    Rock, what are the two macro events? Besides the Fed meeting, what else?
    24 Jan 2014, 12:50 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » 2.5 Macro events Jan 27th-29th

     

    1) Caterpillar Reports Monday - Health of world contruction (cap ex spending indicator....HUGE stock market indicator)

     

    2) Tuesday - State of the Onion Address - markets don't like to make big bets before they hear what new social engineering project(s) our leaders want to create.

     

    3) Wednesday - Fed meeting
    24 Jan 2014, 02:56 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    thanks Rock, I will report back.

     

    when i bought the SVXY was 10% below the recent high. I may have been too impatient, and will study more in future.

     

    thanks again for the feedback, and detail
    24 Jan 2014, 12:40 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Rock,
    For those of us long the vix $13 calls, do you have any advice on when to sell them?
    Thanks
    24 Jan 2014, 12:47 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    @william, I got spoked and sold mine yesterday evening. I was not pessimistic enough!. I made a couple of hundred dollars.
    24 Jan 2014, 01:43 PM Reply Like
  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    My advice - scale your trades. Nobody knows where we go from here. If you are sitting on a 50-100% gain on your calls - take at least part of the gain. When the VIX drops it may wipe out those gains before you even know what happened. I scaled half of my VIX calls yesterday and the rest today. If VIX spikes to 20 I will have missed out - but when I'm looking at a 70% gainer I'm always going to lock a portion of that in.
    24 Jan 2014, 01:57 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » William - Just sold the rest of my VIX call spreads for 30% gain total. Not bad for less than 2 weeks. My risk tolerance has gone down. During QE3 VIX doesn't go much higher than 17 I think 20.49 is the close high.

     

    If I had VIX calls I would sell half today, sell another 25% sometime before the Fed meeting next week and hold onto the other 25% to see how market reacts post Fed. That is the inverse of how I plan to go long SVXY....25% now, 25% before Fed and 50% after Fed. Good luck!
    24 Jan 2014, 03:01 PM Reply Like
  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    Good potential there James - A long way to go today but you might have caught those at the right moment if we don't retest today's lows. I was initially confused at what you were buying but see SVXY split last night.

     

    Rock - thank you for the indicator read! It's a hard call to wade in here with the weekend ahead and events next week. My plays so far today: I jettisoned the rest of my VIX calls with a nice gain just before we started that little reversal so I'm flying without a hedge and missing any additional upside if VIX continues to spike from here. At the same time I added to my XIV position at $32.81. Tried to pick up more ZIV but they didn't fill before the run back up. Looks like we are testing again so maybe they fill - maybe we fall off the cliff - should continue to be an interesting day.
    24 Jan 2014, 12:52 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Rock,
    Also, where can one find the real-time Vratio?
    Thanks
    24 Jan 2014, 01:01 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    great question william, I've been searching as well
    24 Jan 2014, 01:47 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » William - You can't find Vratio real time. What I do is in Google Finance under the main Portfolio that shows up when you go to Google finance home page....I have both VIX and VXV. Then I have an excel spreadsheet that I put in the Top and Current #'s for XIV, VIX, VXV, Contango, S&P 500. My excel calulates and spits out all the data I need in "real time" :) I get contango at Vixcentral.com

     

    In case anyone cares here is my Portfolio List for Google Finance. I watch all of these like a hawk :) They are only in this order because this is the order I added them, no special reason.

     

    VIX
    UPRO
    NUGT
    XIV
    USLV
    UGLD
    LL - I like to know how housing bubble is going
    SPY
    SVXY
    DWCPF - one of my work index funds
    QQQ - Nasdaq
    IWM - Russell 2k
    VXX
    TQQQ - 3x Nasdaq
    VXV

     

    Is it wrong I am smiling so big while the market sinks :) LOL I called the market top by 0.32% - that's my best yet! Jan 10th I said sell it all at the close.
    24 Jan 2014, 03:10 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » BTW - I always buy 30 minutes or less before the close. All my data and indicators are at the close numbers therefore it only makes sense that any strategy I use can't be verified until near the close.......so I buy near the close. Buying 25% SVXY for sure in about 10 minutes.

     

    Never catch a falling knife.....but you can take a small swipe at it!

     

    Wow, the news just keeps getting worse. Talk about a pile on day!!
    http://nyti.ms/1fiKOUM
    24 Jan 2014, 03:28 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    well..I averaged down Rock.

     

    This has been an emotional week. teu and wed, the best trading days I've had...ever, followed by thur and fri...well, the opposite!

     

    So, let us see what happens on Monday.
    P.S. I now have , for the record, 27 $67 Jan31st calls at $1.32 ave, and 8 $67 feb 7 calls at $1.80.

     

    Good luck all for next week.
    24 Jan 2014, 04:05 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » 25% Position SVXY average buy price $63.07 ~ 12% drawdown
    Man, next week will be entertaining!

     

    I made back ~80% of the money I lost on the TQQQ/UPRO start of the year trade with my VIX Call Spread. Next time I will wait until there is no futures rolling forward taking out my premium (buy with less than 1 month left Options) and probably do a straight VIX call option with 2% vice 4 % of trade account. Bigger risk and bigger reward.

     

    No offense to anyone, I pray for a huge market sell off. The bigger the fall, the more opportunity for us to make money on the rise!
    24 Jan 2014, 04:16 PM Reply Like
  • VTH
    , contributor
    Comments (615) | Send Message
     
    I bought 25% svxy position.

     

    Rock, I like sell off, lets keep it coming. On a another note, Rock buddy, you are something, awesome market indicator knowledge, to come out off market Jan 10th and call it top, you are on the way to legendary.
    24 Jan 2014, 07:29 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » VTH - thanks. I will admit when I am wrong as well and I will be wrong in the future - a lot! No one knows 100% or else we would all be millionaires. I will try to be humble and say - lucky guess :)

     

    I said VIX in the 12's doesn't last much longer than 12 days....it lasted 13 this time. There are patterns out there, just have to find the right ones at the right times!
    24 Jan 2014, 07:48 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Can anyone tell me why the spot VIX is 15 minutes delayed on Yahoo and real-time on Fidelity?
    24 Jan 2014, 01:27 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Sold all my VIX calls except for a very small block. Average return about 85%. I used an optimistic limit sell order on 50% that got filled during the 15 minute extended session for the VIX. Limit orders can really boost your return if used properly.
    24 Jan 2014, 04:45 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    congrats William. I got spooked and sold yesterday, too soon, and then bought svxy calls today...too soon...

     

    lessons learned!
    24 Jan 2014, 04:54 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    James,
    The good news is there is always another train to catch. We'll all keep learning to refine the process. I recalculated my average return on the calls and it was 106%. But, I was only 2.6% invested. Following Rock's lead, I bought about 20% SVXY at the close. Looking forward to next week. Good luck all!
    24 Jan 2014, 05:22 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    thanks william. It's been a brutal week. I'm were I started, but tus and wed were the best days of my trading career, and then tur and fri the worst, and as the manchester band james once said
    'if I hadn't seen such riches I could deal with being poor'
    incredible, the singer could not really sing, but this song is one of the most important songs in pop history.

     

    hope you all enjoy....the entire dancehall used to sit down on the floor in 80s manchester to this!
    hope you enjoy
    http://bit.ly/KWNCxv
    24 Jan 2014, 05:26 PM Reply Like
  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    Unfortunately inverse volatility continued to get pummeled in the after-hours. I liked the day better when my VIX calls were hedging my inverse position! What I don't like about the market is the rotation into bonds. Starting to look like we are potentially rolling over here. What I do like are the odds - VIX looks stretched and 'should' start mean reverting - hopefully a quick drop with a few good earnings reports next week maybe.

     

    Really interesting - in the AH we entered backwardation on the forward month. (see vixcentral.com) 16.21 versus 16.20. I think Rock has listed this as one of the 'signs' that things should turn around during QE and we generally haven't spent more than a day or two in backwardation? But with FOMC next week - who knows what could happen.
    24 Jan 2014, 05:52 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » Tortoise - yes, backwardation tends not to last longer than a day during QE but rules are made to be broken. A great indicator is when we go to backwardation and then go back to contango, that is a strong indicator that a bottom was formed and go all in SVXY.....but....that is with no near term macro events. Next week is full of events until 1400 Wednesday after Fed meeting. So even if we go to contango Monday by the close that still won't convince me to take a larger position in SVXY. Might have to wait until then to find out what to do with your money.

     

    Might be very hard to thread the needle on this one. Only time will tell!
    24 Jan 2014, 07:21 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    Rock...it's looking likely that I may well be stuffed on the SVXY $67 jan 31 call then, no?
    I should have kept the faith and kept the powder dry like you advised.
    I was actually punch drunk from my other loses, and reacted badly. Lesson learned I think...just an expensive one...
    25 Jan 2014, 10:24 AM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    hey, here in an interesting piece on yesterdays backwardation

     

    http://read.bi/1hWCzA0

     

    so, basically, backwardation is very bad for the SVXY price as it depends on contango to operate. is that correct?
    25 Jan 2014, 10:29 AM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » James - Probably stuffed on those calls. Options are very dangerous, most expire worthless. Stick to SVXY and at wait until there is a defined bottom and SVXY has fallen more than 10% before doing options and make them 2-3 weeks out. Backwardation usually doesn't last long but yes it does make SVXY go down substantially while we are in it.

     

    BTW - the author of that link is a little bit confused. Backwardation is just a potential signal....the signal is when we go OUT of backwardation that a stock market bottom MAY be coming quickly. I don't like it when people assign value to the "fear gauge" that isn't there. This is why so many people dismiss the power of the VIX and what it can tell you because they look at it statically. You have to look at the whole entire curve, roll yield, contango, ETP drawdown, Vratio, etc. That is the predictive power...but not how far or how fast it ONLY predicts direction and when that direction has changed. Period. There now I feel better! LOL
    25 Jan 2014, 01:00 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    thanks Rock...would people on the board here suggest I just ditch them on Monday or early in the week?
    I spent $3.6 k ( 5% of my portfolio) on them, and they
    have a bid price of $1200, but that was before the
    after hours falls, so possibly only worth $600 on Monday morning.
    So, really, pretty much worthless now anyhow,and most likely worth sitting on.
    average price on these is $1.30

     

    I also have $1100 of the Feb 7th $67 calls, which may work out OK.

     

    BTW thanks for the analysis of the article.
    25 Jan 2014, 01:20 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Rock and all,
    You mentioned a need for real-time V ratio (XVX/VIX) since it is a buy indicator when <1. Is anyone familiar with stockcharts.com? It is a free website that can chart the V ratio real-time. Not sure if the vix is live or 15 minutes delayed. I've never set up a public chart, but will endeavor to do so if no one else knows how to do it. Would this be helpful?
    25 Jan 2014, 09:55 AM Reply Like
  • windwine
    , contributor
    Comments (80) | Send Message
     
    I think the VIX is inherently delayed by 15 mins by design per CBOE. That would be a guessing game if you want to use Vratio to time your trade. And the VIX futures have extended trading time beyond 4pm EST. It is another layer of uncertainty if you are only buying/selling svxy.
    25 Jan 2014, 11:08 AM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » William and Wind - Helpful website William. I don't need a real time Vratio, just thought it would be nice. I only look at it at lunch time and 30 minutes before the close - punch the values into excel, takes 30 seconds no biggie. The 15 minute delay doesn't matter either, if we are 30 minutes from the close and the Vratio is showing buy signal - you buy. It may change by closing but that's close enough for me. You don't have to be that accurate with SVXY to make good returns. Just reasonably close.
    25 Jan 2014, 01:10 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    interesting article published over the weekend on SA, on the VIX action last week, what are your thoughts on this guys?
    http://seekingalpha.co...
    26 Jan 2014, 02:20 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
     
    James, for some reason, I'm not able to click on your hyperlink....can you give me the title of the article?
    26 Jan 2014, 05:39 PM Reply Like
  • windwine
    , contributor
    Comments (80) | Send Message
     
    http://seekingalpha.co...

     

    This is the link.
    26 Jan 2014, 07:14 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    @idkmy, not sure what i did wrong but windpipe has posted the correct link. I would love to agree with the author....although that may be wishful thinking on my part...
    26 Jan 2014, 07:18 PM Reply Like
  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    A good chance we bounce tomorrow. Japan and Korea are down over 2% (China opens in an hour and a half I believe). Futures are down slightly but that's actually good news at this point. See if China shakes things up but I doubt it right now. Note that CAT reports before we open so there's that wildcard. The VIX doesn't like to stay overstretched for long - hope for a bounce at the open and a quick snap-back down for the VIX. Bill Luby seems to agree with the article as well - he was tweeting old articles that stated essentially the same idea as the linked article there. Anything could happen before tomorrow though.

     

    James in another post you asked what you should do with the weeklies. I've been pondering that question but can't come up with a good answer so just a few thoughts: When I think about option positions I just think about the amount of my portfolio I am ok losing entirely. My 1% play in VIX calls was made because a 1% drop in my portfolio value is also known as a normal day - meaning it wouldn't matter much. A 5% portfolio drop in a week would hurt a lot. If you could recover half (assuming these are valued at 50%, which maybe isn't the case) - a 2.5% drop would be an easier loss to recover from than 5%. I think that is the "right" play from a capital preservation/risk management approach. If we bounce tomorrow (yay!) I would try to scale it throughout the day. With my risk tolerance I would try to be out of it by close tomorrow whether we bounce or not with FOMC still coming. And do watch for whip-saws back down even if we do bounce. Trying to get back to even can be costly - sunk costs are sunk and while it's human nature to try to hold out for a gain - if you wouldn't make the same investment today, it's usually better to take the pain and wait for a better entry with a longer time frame. That said, knowing myself, if these were worth 10% of what I paid I would probably just say @#$% it and hold them as a lottery play for post FOMC (just had to throw in a counterpoint to contradict everything I said ha!) Whatever you do best of luck! Those options are probably levered at 20x or more so could be a wild ride.
    26 Jan 2014, 08:25 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » Tortoise - Don't mean to spill cold water on you guys but let's be realistic. Pre-market US means nothing until 8AM US time. Japan and China are down about 2.5% right now and if you don't think that can have some spillover to us....The big thing to watch is the Dollar/Yen. If the Yen keeps climbing in value then the carry trades start getting margin calls and the over-leverage cuts in a bad way. There are so many hurdles next week I just can't see stocks leveling off until after Thursday morning after the GDP number.

     

    That being said, where the VIX goes is anyones guess. This is a high level for it to be at during QE3. Looking for my signals to get longer SVXY, hopefully around 20% drawdown. :) Posting article ASAP with some good info.
    26 Jan 2014, 09:06 PM Reply Like
  • thetortoise
    , contributor
    Comments (102) | Send Message
     
    Thanks Rock! New article! Awesome! Have to remember to keep checking for those! Agreed on the futures - and no cold water here - whatever CAT reports in the AM will carry a lot more weight. I'm actually fine whichever way the market goes. The higher the VIX the more money we make on the way down. Looking forward to the new article!
    26 Jan 2014, 09:36 PM Reply Like
  • jamesingram32
    , contributor
    Comments (576) | Send Message
     
    tortoise, thanks for the post, and your suggestions. I'm sort of at the same point as you on them. The spread on these calls means that at this point, so far out of the money, I'm at the point of viewing them as a lottery ticket. I'll see what the day brings though, and may add, anyhow, to the position through the week, keeping note of what you experienced guys are doing first.

     

    hey, does the german January Ifo have a bearing on todays action?
    http://cnb.cx/1d4vzM3
    27 Jan 2014, 04:09 AM Reply Like
  • jeezuz30
    , contributor
    Comments (642) | Send Message
     
    Nice article and comments stream.

     

    I've shorted a few shares of UVXY, starting on Thursday and adding some more to my position on Friday after the big spike.

     

    Gonna follow your rules and see how it goes as it will be my first time with anything VIX related, though I've been watching for a while and getting a feel for it.

     

    So far pretty close to even but can't wait to see what happens tomorrow morning, looks like the Nikkei is dropping 2 1/2% but that ones always volatile anyways.
    26 Jan 2014, 09:21 PM Reply Like
  • ikkyu
    , contributor
    Comments (293) | Send Message
     
    Hello Rock and Everyone...
    This list of rules was really timely for me, as I am in the act of solidifying my system and trading rules as well.
    This is what I would add on my rule list:
    -Forgo all options strategies for directional trades.
    -Stick to the middle of the futures term structure.
    The first point I reference in the comments to your 2013 post. Short of synthetic shorts or longs, I don't see any use for options in trading medium to long term trends in vola. Maybe if you are swing trader, but I haven't seen much in the way of viable systems for periods of less than two weeks.
    The second, adjusted for risk, short mid-term vola futures always beat short short-term futures over the medium to long term. I see no point in playing around in the noise near the end of the curve.
    I am thinking about adding a third that would say: "Always be fully long or short." Going beyond a binary systems makes things considerably more complicated.
    Any thoughts?
    Vratio is below 1. Interesting times, indeed. Everything is rolling over so slowly that this could be a bigger move.
    Also, I am loving the yen strength!
    Cheers from Osaka,
    john
    29 Jan 2014, 10:23 PM Reply Like
  • IndyDoc1
    , contributor
    Comments (324) | Send Message
     
    Rock,
    To summarize your strategy, you are saying that the VIX has been trading, on average between 12 and 17.8. Using this information , you suggest that trading signals will be triggered when the VIX value are at or close to either of these values. Am I correct?
    Also, I found this article about trading volatility, let me know what you think
    http://bit.ly/1g5awN1
    6 Feb 2014, 07:17 AM Reply Like
  • calendaroptions
    , contributor
    Comments (5) | Send Message
     
    This man knows what he's talking about. He just explained the BEST risk/reward, highest winning probability strategy available ANYWHERE. Nothing can beat this strategy. Only possible risk is some kind of fraudulent behavior by the companies involved in SVXY and XIV, if some apocalyptic ".......hits the fan". But then, all goes bust anyway, so why worry. Until then, forget all swing and daytrading, and do as this wise man teaches.
    22 Nov 2014, 06:18 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Author’s reply » Calendaroptions - Thanks. There is a lot of money to be made off of poor risk management techniques by the investor class. Good luck!
    24 Nov 2014, 07:44 PM Reply Like
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