VXX: Profit From Reduced Volatility

Includes: VXX, XIV
by: Supreme Alpha

Greece is causing the market to whipsaw back and forth from headline to headline. It's evident from the looking at the volatility index (VIX).

I like to look at VXX, the Short Term futures of the VIX, based on the S&P 500. VXX has gone from 20 in the beginning of July to a high of 59.18 on 10/4/11, then came all the way back to 35.94 on 10/28/11. In just three trading days, it's back up to 44.50. This volatility presents trading opportunities. I do think the Greece situation will get resolved sooner rather than later. Greece will agree to the bail out plan that they agreed to earlier. A new government will probably be in place. The market will calm down and the VIX will come down. That combined with lower interest rates in Europe and good earnings in the U.S. should at least put a floor on how low the market will go.

Technically, VXX traded back below the 20 day moving average after spending just two days above the line in the last 19 days. The trend is to the downside.

Click to enlarge

You can short VXX or simply buy XIV, which is the inverse of VXX. I prefer to buy the XIV. In the short term, VXX can easily trade back down to the 36 level and possibly go much lower.

Disclosure: I am long XIV.