Bets against higher volatility (and there are a ton of them) get fried, with the VIX up 23% and...


Bets against higher volatility (and there are a ton of them) get fried, with the VIX up 23% and hitting a new YTD high. The level of shorts in some VIX ETPs is eye-popping, with 273% of the share count of the Ultra VIX Short-Term Futures ETF (UVXY +20.9%) out on loan, reports Ned Davis. Of the unleveraged products, 75% of the Short-Term Futures ETN (VXX +10.4%) is on borrow, and 110% of the S&P Dynamic VIX ETN (VXZ +4.3%). "This is one of those trades that works remarkably well until it doesn't," writes Brendan Conway. Indeed.

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Comments (9)
  • Zeus2012
    , contributor
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    Which is why you always short the VXX via a put spread instead of selling calls or buying the inverse ETF. You will make money more than 95% of the time but the small percentage of when you do lose, you lose huge.
    20 Jun 2013, 04:09 PM Reply Like
  • 4Foolz
    , contributor
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    100% agreed. XIV and SVXY are not good long term options since the spikes crush their returns. These can go up 20% but a 15% fall gets you into negative return territory. A math trick. You short VXX or UVXY by buying put spreads. That's the best way to play it.
    20 Jun 2013, 10:19 PM Reply Like
  • cma
    , contributor
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    Zeus,
    A very interesting comment on VXX put spreads. However, would you not have to pay a debit for those spreads (1:1) and lose money most of the time?
    20 Jun 2013, 05:42 PM Reply Like
  • Zeus2012
    , contributor
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    VXX has been trending downwards over time. Yes, it's spiked over the past few weeks but don't see this lasts.

     

    Not sure where you get that one loses money most of the time - check out the chart on VXX. By the way, you don't have to hold it to maturity.
    20 Jun 2013, 05:46 PM Reply Like
  • cma
    , contributor
    Comments (309) | Send Message
     
    I meant that if you pay a debit for a spread, then you need the spread to move in your direction within a fairly short period of time, e.g., 4-6 weeks, since you won't be doing longer term put spreads because of lower liquidity in getting in and out of them.
    25 Jun 2013, 11:31 AM Reply Like
  • The Sociology of Finance
    , contributor
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    All the "smart money" knows about the short VIX trades. I'm on the sidelines until more of the shorts get washed out. Then, I'm buying SVXY.
    20 Jun 2013, 09:44 PM Reply Like
  • bfstrog
    , contributor
    Comments (74) | Send Message
     
    I don't get the short VIX trades at all. Sure, they're mean reverting but there has been so many opportunities to but UVXY when the VIX is under 13... and it doesn't stay there for long. The VIX won't crash from 12 to 9, but it will spike from 12 to 20 (as seen today). With SVXY or XIV the sky is the limit (for your losses) when the big one hits.
    20 Jun 2013, 10:02 PM Reply Like
  • Seth Walters
    , contributor
    Comments (675) | Send Message
     
    273% of the float short? LMFAO. That will breed the mother of all short squeezes. I am ready. Go go bond vigilantes - time to show the market that crass money printing can prop up the market, prop up the old order for a few years, but it will always end badly. It was a mistake to pander to the capital markets while the common man suffers and real jobs aren't coming back. All it has done is encourage a malinvestment boom that has only made structural imbalances in the economy worse and prevented an adjustment from the last bubble. It's a toss up if you want to say that Bernanke did it to benefit his investment banker buddies, or did it to save them markets from themselves in 2008. In the end, the free market will reassert itself, the strength of the Fed will fail, and history will judge people rightly for what they have done.
    21 Jun 2013, 12:30 AM Reply Like
  • Nukeman
    , contributor
    Comments (46) | Send Message
     
    As I mentioned a few times before, when you get a chance, just short VXX, ESPECIALLY when it pops up. When VXX is not available for shorting, then short VXX Calls. VXX is designed to go down by the issuer (*who issues unlimited number of it), and will go down eventually. Keep shorting it and you will get rewarded.
    22 Jun 2013, 12:08 PM Reply Like
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