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Perceptions what is "low" on the VIX (VXX) are skewed by the financial crisis, writes Adam...

Perceptions what is "low" on the VIX (VXX) are skewed by the financial crisis, writes Adam Warner. Prior to 2008, a VIX above 30 for any length of time was unheard of, and a level in the teens was the norm for years on end. This doesn't mean options aren't cheap at these levels - they are, and replacing stock winners with calls at these prices wouldn't be a horrible strategy.
Comments (4)
  • DeepValueLover
    , contributor
    Comments (8529) | Send Message
     
    Selling near all time highs guarantees locking in a good return.

     

    Buying near all time lows guarantees locking in a good return...over time.
    23 Jan 2013, 01:55 PM Reply Like
  • hedgetowin
    , contributor
    Comments (45) | Send Message
     
    Be careful thinking buying VXX is like buying VIX. It is not. Buying VXX is more like buying an insurance policy that VIX will rise. If VIX does not rise expect to pay periodic premiums (VXX will decay over time compared to VIX). The same goes for TVIX, VXY, UVXY, etc.
    23 Jan 2013, 02:41 PM Reply Like
  • MarcJoli
    , contributor
    Comments (81) | Send Message
     
    If one had faded the "elevated" VIX when the politicos were resolving the fiscal cliff issue on December 31st, you would have made between 28% and 36% profit (depending on your timing) by shorting VXX. Similarly, buying XIV would have got you 36% to 44% until today, again depending on your timing on December 31st.

     

    It is notable that XIV outperformed a VXX short because of the daily compounding where XIV is gaining every day. Normally, over long periods, shorting VXX is a better return as not every day is in the same direction.

     

    Was this a risky trade only to be done by professionals? No, I dont think so. Just watch for a convincing move down in the VIX AND VIX futures after some sort of crisis and then get on that bandwagon. Myself, I got shaken out early and missed the first couple of big days but then I got on the momentum and so far I am up 20%. Not bad for less than one month!

     

    Going forward, I think an XIV or VXX Short are still good (but not necessarily a big mover ) until you see the momemtum reverse.
    23 Jan 2013, 02:53 PM Reply Like
  • jeffschulte
    , contributor
    Comment (1) | Send Message
     
    This is true. But what happens when you purchase the VXX in the teens and it is reverse split x4 as it was this past Fall. And now it drops back into the teens again. Someone made out on this and it was not me.
    23 Jan 2013, 03:58 PM Reply Like
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