Another Big Week For VIX - Is There More Upside?

Another week of gains for VIX (+16.5%) has made for a +30.9% move over the past 2 weeks. VIX futures gained as well this week, driving VXX up 3.4% and ZIV down 0.8%. Below is a view of the VIX futures term structure week over week:

While the VXX bias remained dismally low all week, on Tuesday evening our VXX Spike Risk Daily Forecast algorithms moved into the danger zone with a reading of 5.9. Since then VXX has gained 6%.

Our Trading Volatility+ members had the opportunity to use this information to act accordingly and mitigate risk in their trades. For just $2/day via a 6-month subscription, having access to this insight to help mitigate losses and improve gains is an absolute bargain.

XIV is now down 7.0% since our Trading Volatility Insiders received notice that we were drastically reducing our holdings on May 17th. We'll continue to keep Trading Volatility Insiders updated on all our trades and provide other market insights at no additional charge for all Trading Volatility+ subscribers.

Access to the daily forecasts, our trade notifications, and everything else outlined on the Trading Volatility+ page is available through subscription. For those interested we are currently offering a $120 discount on 6-month memberships through June 20th as part of our service launch celebration.

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VIX Futures Market Update - 5/28/13

Last week saw a rise in volatility across the entire curve, with spot VIX leading the way at +13.12%.

With this move, both the short term futures inverse fund (XIV) and medium-term futures inverse fund (ZIV) lost ground on the week at -3.8% and -3.6%, respectively. Trading Volatility Insiders were informed on May 17th that we reduced our holdings in both of these funds to just half positions, thus reducing our exposure a bit until there's a better trade setup.

Trading Volatility+ subscribers will be keeping a close eye on our Daily Forecasts and VIX Futures Data as market conditions change in order to identify the next trading opportunity. At this point the roll yields for XIV and ZIV remain positive but are relatively small and provide only a slight tailwind. The equity markets are showing some signs of exhaustion in this rally and the VIX futures continue to indicate that caution is warranted.

Subscribers to Trading Volatility+ can also choose to receive updates from the Trading Volatility Insider service which includes notifications of our trade entries/exits at no additional charge.

You can sign up to become a member at the subscribe page. We are currently offering a 25% discount on 6-month memberships through June 20th as part of our service launch celebration.

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Notice: Update To Historical Volatility Calculations

Changes have just been made throughout the site to the number of days that are used to calculate historical volatility.

- The 1-month lookback period now uses data from the 20 most recent trading days (HV20) instead of 21
- The 3-month lookback period now uses data from the 60 most recent trading days (HV60) instead of 63

The changes bring these metrics into line with what most traders are familiar with.

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VOTE: A Trading Volatility Forum?

Looking to get your feedback on the idea of a Trading Volatility forum.

The idea would be to have a place where members can interact with each other and share their collective knowledge on strategies, technicals, insights on current conditions, etc for trading VIX products.

Vote below.

Free polls from
Would you be likely to use a forum on the Trading Volatility website as a place for members to share ideas about VIX-related trades?

Yes   No     

UPDATE [5/14/13]: There appear to be a lot of interest in this idea. Look for it to be ready in the near future!

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New Subscription Services And Other Changes Coming To Trading Volatility

Today I have some important announcements to share with you all regarding the Trading Volatility website.

First though, I would like to thank all of you for supporting Trading Volatility. Your interest and enthusiasm for the site has been a huge source of motivation for me to continue to make improvements in order to make this one of the best volatility trading resources available on the Internet. I also want to send an extra special Thank You to those who have donated to the site. Your contributions have helped the site to grow during a critical phase.

I've really enjoyed helping people learn how to navigate the world of volatility products by sharing the knowledge and tools that I've built over the years. The number of visitors to the site has increased dramatically recently, and at times it’s been difficult to keep up with responding to all your great questions and comments.

I want to continue to be able to provide you with the information you need to successfully trade volatility products and to expand the site's capabilities, but in order to do that I need make a few changes.

Starting May 18th, some portions of this site will no longer be accessible for free. Instead, a new site, Trading Volatility+, will be made available to paying subscribers. For details on what exactly will change please see a description of the services below.

Access to Trading Volatility+ will be available for $80/month. However, during the next month I am making a six-month subscription available for $360 as a thank you for supporting the site in this early stage.

If you later decide that the service isn’t for you for whatever reason and would like to cancel your access to the site, just let me know and I’ll be happy to issue a prorated refund based on the time remaining on your subscription.

I've also had many requests for a service which communicates my VIX ETP entries and exits. The delivery mechanisms and details of the service, Trading Volatility Insider, are still being worked out. So for now this will be unofficially available at no additional cost to any Trading Volatility+ subscribers who are interested. After you sign up for Trading Volatility+, send an email to and let me know you’d like to be added to the list of people to receive updates.

For expanded descriptions of the services that will be available please visit the Trading Volatility+ page.

Referral Bonus: Do you love what Trading Volatility offers? Recommend us to a friend! For every paying subscriber you refer to us you’ll get a free month of access to Trading Volatility+.** 

Service Description Overview (effective 5/18/13):
*VIX futures term structure chart
*VIX futures quotes
*Historical market volatility quotes over various lookback periods (2 week, 4, week, 6 week, and 3 month)
*Intraday SPY Arbitrage model
*Delayed data (by 1 week): all forecasts, historical VIX data charts, and daily SPY arbitrage model
*Past Trading Volatility blog posts outlining the ins and outs of volatility ETPs

VIX Futures Data
*VIX futures term structure chart
*VIX futures quotes
*VIX Futures metrics (XIV and ZIV roll yields, ratios of forward volatility to historical volatility, premium of front month futures to VIX, and term structure slope)
*Historical market volatility over various lookback periods (2 week, 4, week, 6 week, and 3 month)
*Six month chart of VIX Futures data
*Six month chart of actual volatility vs implied volatility
*Six month chart of front month futures to VIX premium
*Six month chart of term structure slope
Daily Forecasts
*VXX Bias + 6 month historical data
*VXX Spike Risk + 6 month historical data
*ZIV Bias + 6 month historical data

SPY Arbitrage
*Intraday SPY Arbitrage model
*Daily SPY Arbitrage Model

*Notifications of trade entries & exits

**Each referral must pay for and maintain membership to Trading Volatility+ for at least one month in order to receive the referral bonus.

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The Week Ahead In VIX Futures - 5/7/13

Volatility futures across all months have been back on the decline at a fairly even pace since the spike in mid-April, as can be seen below (all charts from the VIX Futures Data page)

You can see that the overall spread and spacing between month 1 and month 7 has stayed pretty constant during this time, making for a consistent contango term structure.

You may also notice that the lines are more compressed during this time than they have been in previous months. This compression represents a flatter term structure, which can be specifically measured (using calculation of ln(M7/M1)) and plotted on the graph below.

It's another way of looking at how the slope of the term structure curve changes over time. The previous two graphs are on the same timeframe so you can directly compare what the slope looks like on days with a wide separation vs days with a narrow separation. For the past two weeks the slope of the term structure has stayed fairly constant in a pretty weak contango, with readings between 0.2 and 0.25.

I made a point about the flattening of the term structure last Wednesday as the slope reached 0.19 and the VXX Spike Risk gauge hit 5.8. The following day (May 2nd) the markets rallied and the term structure steepened back up, staying above the 0.20 mark which I find to be critical to maintain to keep inverse VIX products (XIV & ZIV) moving upwards.

So where does that leave us going forward? To answer that we move on to the Daily Forecast page.

Looking at the recent VXX Bias values, the time to look at going long XIV was when the VXX gauge crossed from  positive to negative bias on 4/17.

However, the value on the VXX Spike Risk gauge for the same day showed that the risk was a 7.3 (out of 10), indicating that VXX was very likely to see more upside:

As I noted in my recent post on using the forecast gauges, the bias is the best predictor for long term price movement while the spike risk is better for price in the next couple of days.  So according to the model, the best play was look to get long XIV was on 4/17 while VXX spiked (XIV dropped). Although because the risk gauge was elevated you want to manage that risk through either VXX call options or a smaller position until that risk gauge fell back below 5 (on 4/23). Note: Had the VXX Bias gauge turned back positive for the 4/18 forecast I'd look to exit XIV promptly.

As of today the bias remains negative for VXX so the best play is still long XIV / short VXX. The roll yield remains small, however, and the spike risk is a moderate 4.6. This is still reason for caution, and if you're not a position here already it's probably not the best time to jump in.

In terms of further downside for VXX over the next week, we're not yet in the basement as VIX could still push on down towards 3-month historical/actual volatility (HV63) which sits at 11.60, near the March VIX lows.

Looking at the ZIV forecast you can see that the bias remains positive although it appears that it could be slowing. I think this is another instance of something that is correct to stay in if you're in it, but not a great time to enter (also see the 2 year view of the ZIV bias if you haven't already).

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Updates To XIV And ZIV Roll Yield Calculations; List Of Number Of Days In Remaining 2013 Roll Periods

I made a slight adjustment to the calculations of the roll yield per week for XIV and ZIV on the VIX Futures Data page. The values shown now factor in the exact number of days in the roll period (previously the calculation used a constant 21 days as an approximation).

The impact of this change is a reduction of the yield estimates that were reported yesterday by about 0.2% since the roll period for ending May 21st contains 25 days.

Below is a list of the number of days in the remaining roll periods this year.
- Ending June 18:   19 days
- Ending July 16:    19 days
- Ending Aug 20:    25 days
- Ending Sep 17:    19 days
- Ending Oct 15:    20 days
- Ending Nov 19:    25 days
- Ending Dec 17:   19 days

For more information on roll yields see this post.

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New to Daily Forecasts: Addition of ZIV and Tracking of Forecasts to Results

Volatility ETPs can be tricky to trade but you can actually do pretty well just by adhering to the #1 rule: Follow the term structure. However, the market sends additional signals on future price movements that can be decoded if you know where to look. Paying attention to these signals can help improve your trading performance. 

When the day's action is over and VIX futures have settled I will look at various VIX futures metrics (found on the VIX Futures Data page) and make a determination if I should buy, sell, or hold various VIX ETPs. To better communicate my outlook on these products I've rolled up most of the metrics I use in making decisions into Daily Forecast gauges.

I first introduced these gauges last month. Today I've expanded the daily forecast to include ZIV and I've added some charts to track the daily forecasts against the actual performance of the securities.

For the VXX forecast there are two components to the VXX forecast - the Bias and the Spike Risk. 

VXX Bias 
This gauge measures the bias of VXX and is largely determined by the roll yield (more on the roll yield in this post), which can be conceptualized as a headwind or tailwind. The gauge values are on a scale from -10 to +10, with a more negative reading indicating a stronger negative bias (headwind), and a more positive reading indicating a stronger positive bias (tailwind).

May 3, 2013 Update: Note that the gauge's range was expanded yesterday to cover +4 and -4 standard deviations from the past 9 years of data for a total of 8σ (previously was 6σ). This tweak to account for a wider range of values has the effect of making the numbers on the scale smaller than they were previously but everything is still on a scale of -10 to +10. The neutral zone is now at +/-1.

March 2, 2014 Update: The Bias indicators now include inputs for the direction of short-term price movements. See this post for details.

VXX Spike Risk
The second forecast gauge reflects the probability of a sharp spike in VXX in the very near term (1-2 days). As inputs, it takes data from the term structure of the front two months of VIX futures, the premium of front month futures over (or under) spot VIX, historical volatility, and recent moves in spot VIX to identify various risk conditions.  All risk conditions are then weighed together to provide a single output to represent the total risk. The higher the reading, the greater the risk of a large magnitude spike.

The gauge's output is a scale of 0 to 100%. Values below 25% indicate a low risk of a spike in VXX. Values between 25% and 60% are moderate risk. Values above 60% are high risk. Typically any reading above 50% is cause for some concern.

Using the Bias and Spike Risk Gauges Together
The Bias gauges provides a view of the direction of VXX and ZIV over a medium timeframe. There may be occasional moves in the opposite direction, but over the course of several weeks, the price of VXX will typically move according to the Bias of the gauge.  Red means it's going down, green means it's going up, and yellow means sideways and generally choppy conditions.

The Spike Risk Gauge gives information about the probability of moderate or large spikes on a more short timeframe (1-3 days out). When long XIV (or short VXX/UVXY), this can serve as a signal to make sure you are adequately prepared for such a move just in case, i.e. reduce positions, exit positions, buy protective VXX calls, set stops, or maybe just get mentally prepared to see the value of your holding go down.

Obviously there are market/world events which will cause VIX and VXX to spike dramatically without warning. While this model cannot predict the unexpected, it does provide the ability to detect shifts in investor sentiment of known macro risks.

ZIV Bias Forecast
The ZIV forecast only has a bias gauge because the VXX spike gauge can be applied to ZIV. The differences being that ZIV will move in the opposite direction and generally at a smaller magnitude. Similar to the VXX bias gauge, the ZIV bias gauge estimates the direction and strength of ZIV based on the shape of the term structure, but also includes an adjustment based on the shape of the front end of the curve under certain conditions. The scale is also from -10 to +10 with the neutral zone at +/-0.5. As you can see below, the reading based on Thursday's forecast of 2.7

Tracking Forecast Results
To give this some context I've included a six month view of data comparing the values of the forecast to the price of ZIV at the bottom of the Daily Forecast page. For an extended look at the ZIV forecast, below are the results from April 2011 to present (forecasts on the left axis; ZIV price on the right axis (log scale)). Generally long ZIV is a good play when forecast values are in the green zone on the bias gauge (above 1).

Similarly for VXX, the 2 year chart shows that being short VXX when the bias is below -1.0 (red zone on the gauge) and long VXX when the forecast is above 1.0 (green zone on the gauge) are very good trades. Note the choppiness in the price of VXX when the forecasted bias in in the neutral zone (forecasts on the left axis; VXX price on the right axis (log scale))

The 2-year chart of Spike Risk vs VXX % Change is a bit harder to read on this time frame but I've included it below anyways. A well-formed model will have a reading of 50% or higher (left axis) prior to any significant daily spikes in VXX (right axis). You can alternatively view the 6 month chart on the Daily Forecast page for a cleaner view on a shorter time frame.

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VIX Futures Flash Warning Signs

Some negative developments in the VIX futures term structure occurred today with a flattening of the term structure (see full current term structure data here):
 - Spread between M1 and M2 narrowed to -0.75
 - Spread between M4 and M7 narrowed to -1.15
 - Spread from M1 to M7 narrowed to just -3.15 points

The roll yields for XIV and ZIV fell to 1.1% and 1.5%, respectively.

To put the M1-M7 spread in context here is a view of the slope of the VIX futures (left axis) along with the price on XIV (right axis). A slope reading below 0.2 has typically been market negative in the very short term over the past few years (today's closing was 0.19).

The rise in VIX to 14.49 (+7.2%) brings it to within 5% of front month futures and increases the risk of a larger VXX spike in the short term. The volatility risk premium remains negative, with actual volatility over the past month (HV21) at 14.77.

The VXX forecast VXX spike gauge reflects these changes with a reading of 5.8. When the reading on here is above ~5.5 you can generally expect some choppiness in the price of XIV & VXX as a best case, and worst case of some large VXX moves upward.

Because of these current conditions and a multitude of warning signals I'm still not interested in a XIV long position. As I've suggested in the past week herehere, and here it makes sense to look into some cheap VXX calls as a hedge if I were long XIV/SVXY or be out altogether.

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