VIX Futures Weekly Wrap

It was a volatile week with a ridiculous Monday-Tuesday rally driving every point on the VIX futures curve one full standard deviation below historical averages before the big move up in the second half of the week.  Front month VIX futures (January) saw big gains this week as traders rolled over their protection with December options expiring (as predicted last week). 

VIX Futures Weekly Performance:

Jan-13	Feb-13	Mar-13	Apr-13	May-13	Jun-13	Jul-13
+6.1%	+1.6%	+1.3%	+0.5%	+0.2%	-0.5%	-0.2%

After seeing these numbers you might be surprised to learn that S&P 500 actually closed up 1.1% on the week.  At this point it seems that traders who wanted to buy protection have done so, making a short-term trade in shorting front month volatility (by buying XIV) somewhat attractive. However, due to the complete unpredictability of negotiations in Washington as we approach year end this still a bit like playing with fire. Might as well stay in cash and enjoy the holidays.

VIX term structure at the close of each day this week:

 

Today's Market: Bearish Divergence in VIX

In today’s market we saw a major bearish divergence in the correlation between SPY and VIX futures (and VIX) with the SPY closing up 0.6% and January VIX futures up 2.34% (as reflected by the move in VXX). This reflects a strong bid for put protection in January options as I discussed would happen last week.  In fact, over the past three days both the spot VIX and January VIX are up over 8% while the SPY is up nearly 1%. What this is telling us is that a pullback in SPY down to near support at 142 in the near future is very possible. Surely you bought some protection after I suggested in my previous post?

Market Complacency

While most people and the mainstream financial media often look at the spot VIX to gauge the level of fear in the market it really only tells a small part of the story.  The CBOE also provides values for VIX to track the expected volatility for each of the next nine months into the future.

An interesting point and indicator for market complacency is that the sixth month VIX future (May 2013) continues to float near its lowest point (20.5) since Oct 12, 2007 – the day after the S&P 500 hit its all-time high. This suggests that very few traders see a need for protection in the market at these levels, with an assumption that a market-positive fiscal cliff deal will get done, that the sovereign debt issues in Europe are under control, and the belief that the FOMC’s dovish policies will provide continued help for a domestic economic recovery.   While not a signal for a market sell off, it may serve as a good opportunity to pick up some protection in case the market turns down.

VIX Futures Weekly Wrap

During a sideways week of indecision for the broad US equity market (SPY down 0.2%), it can be helpful to break down the movement in VIX futures to provide some insight into market sentiment. 

VIX Futures Weekly Performance

Dec-12	Jan-13	Feb-13	Mar-13	Apr-13	May-13	Jun-13
5.0%	-0.3%	-0.5%	0.5%	0.7%	0.7%	0.9%

Front month VIX futures rose 5% as traders bought some downside protection in the event that congress does not come up with a positive deal on the fiscal cliff.  The price and recent movement of January futures and beyond indicates that most traders are not particularly worried about long term effects of the discussions. If no deal is reached next week it is likely that we’ll see a move higher in January VIX as well as traders start rolling over protection to replace December options.

The Temptation of VXX

After closing out a position in XIV as I did on Tuesday, it can be tempting to take the opposite side of the trade in something like VXX (VIX short-term futures) or UVXY (twice leveraged VIX short-term futures).  With the sizable move from $28.85 to $29.60 in the last hour of trading yesterday, VXX has broken above its trendline (I use the 9 Exponential Moving Average) on the hourly chart and is continuing to ride that trendline higher. If you are can closely monitor your position during the day this can turn in to a nice trade.  However, given the current underlying structure of the VIX futures components of VXX, it is prone to sudden reversals and requires a trailing stop to protect gains.  Otherwise gains can quickly evaporate and turn into losses.

In my strategy and in this blog I focus on trades in positions that are intended to be held for at minimum one day and as long as several months, and must have a high probability of a positive return.  And while VXX continues to zoom higher as I write this, as of right now there is still no trade here that meets my criteria.

Initial Post

Today I am launching a blog in which I will discuss trading of Volatility (VIX) Futures through various ETFs and ETNs. Additionally I will be disclose my trades in this area, primarily for historical documentation purposes.

I have spent two years assembling data and completing quantitative analysis and modeling in order to build strategies for trading short-dated (1st and 2nd month) volatility futures. These strategies have substantially out-performed the standard market benchmarks and my goal with this blog is to share my experience.

Yesterday I received a signal to exit a trade in XIV (VelocityShares Daily Inverse VIX Short Term ETN) that I opened on Nov 12, 2012.   Entry price was $16.65 and the exit price yesterday was $19.61, for a
17.8% gain.  At this time there is no trade in place until we see the next market signal.


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DISCLAIMER: I am not a licensed investment adviser. Trading of securities, options and futures may not be suitable for all individuals and involves the risk of losing part or all of your money.  It is important to do your own analysis and accept full responsibility for any investment decisions you make. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2012-2013 Jay Wolberg. All rights reserved.

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