Complacent? Shorts exit VIX ETN

Bets on a decline in the iPath S&P 500 VIX Short-Term Futures ETN (VXX -1%) have fallen to 25% of shares outstanding from a record 126% in February, according to Bloomberg. Shorting the VXX is a play on continued calm in the markets, and a bet (along with other short volatility moves) that earned plenty of coin in 2013.

The VIX jumped 4.4% yesterday as stocks struggled, but has closed below 15 for 24 consecutive sessions, the longest streak since about the time surrounding the start of 2014. It hasn't climbed above 18 since February even amid Russian tension and sizable selloffs in small caps and tech momentum names.

“The longer you go without a hurricane, the more likely it becomes for the next period,” says Mark Yusko, CIO at Morgan Creek Capital. “It’s usually around those times, when everybody is convinced nothing can happen, that something happens. Markets tend to move to extremes. Those alligator jaws don’t stay open forever. They eventually snap shut.”


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Comments (9)
  • Seppo Sahrakorpi
    , contributor
    Comments (2146) | Send Message
    I am waiting, patiently, looking forward to getting some SVXY when that happens :)
    21 May 2014, 10:41 AM Reply Like
  • ianxponent
    , contributor
    Comments (749) | Send Message
    Got in at 53 and 59 awhile back and am thinking of taking profits at this point then wait for a spike in VXX before buying again.
    21 May 2014, 05:40 PM Reply Like
    , contributor
    Comments (4) | Send Message
    There's nothing to prevent the VIX from falling further - even below 10 is a possibility (which happened around seven years ago). So long as the Fed keeps interest rates at zero, which will most likely be the case for another year or more, the VIX will continue to fall and the market will continue to rise.
    21 May 2014, 12:30 PM Reply Like
  • pinkusben
    , contributor
    Comments (18) | Send Message


    Don't wait start scaling in and use every drop as a buying opportunity, remember all those that waited in 2013.
    21 May 2014, 03:01 PM Reply Like
  • Darrylb
    , contributor
    Comments (25) | Send Message
    Seppo, how have you been? I side with you. I don't think I'd initiate a new position without a pullback, but I'm not sure I'd sell if I were holding with a Holiday, month end coming and nice contango. But with VIX, it hits the fan when things look the best. Personally, I have SVXY with covered calls which is sure to be called away Friday and some XIV.
    21 May 2014, 08:47 PM Reply Like
  • Seppo Sahrakorpi
    , contributor
    Comments (2146) | Send Message
    Things are good. I got burned a bit on SVXY earlier this year, and bailed/chickened out too early as SVXY was clearly broken, and since I did not have the stomach to wait it out. I learned my lesson...learning by doing...


    But now again it looks like the stars are lining up as you mention. I'll be buying in the next pullback when we get VIX spiking to 16-17+...
    21 May 2014, 09:24 PM Reply Like
  • ikkyu
    , contributor
    Comments (293) | Send Message
    Hey Darryl,


    I have heard you mention covered calls on SVXY before. Why not just sell naked puts on SVXY or do a spread on VXX? Seems cheaper and much less cash intensive.


    Cheers from Osaka...


    22 May 2014, 07:42 AM Reply Like
  • User 15467582
    , contributor
    Comment (1) | Send Message
    Be careful owning SVXY since it is in a partnership form and the forthcoming Form K-1 might negatively surprise you vis-à-vis taxes.
    22 May 2014, 07:58 AM Reply Like
  • Darrylb
    , contributor
    Comments (25) | Send Message
    Greetings ikkyu! It's been awhile. Correct me if I'm wrong, but isn't a covered call position also a synthetic short put - so I have the same thing as a naked put? I believe they have the same risk characteristics. I do see your point about cash outlay, but this was in an IRA.


    I do think the VXX put spread is an excellent idea. VXX has nice tight spreads and SVXY doesn't.


    In my case, I already had the SVXY and I mistakenly thought it wouldn't keep going up 4% a week, so I sold calls for a little extra cash.


    User 15467582, good point on the K-1. I use XIV in my taxable accounts.
    22 May 2014, 01:16 PM Reply Like
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