When XIV Loses Its Edge: Getting Into Defensive Mode

Actual market volatility has clearly picked up over the past month as the broad market tests both upper and lower ranges to figure out the next major direction.

As I discussed in our members' forum post on 6/14, I expect choppy conditions and urge caution for XIV longs over the next few months. During this time there will be streaks of days where VXX will gain and streaks when XIV will gain, but over the course of weeks I tend to think the wide price swings will prevent either of these from really going anywhere. 

Overall the volatility futures market is not sending very positive signals, as we can see from the data on our VIX Futures Data page.

The premium of front month VIX futures to VIX has been decreasing (a concept I outline here):

The slope of the term structure is flattening (which I define as important here):

I think there are still opportunities to make money by trading XIV and VXX in these swings but it requires a more active trading strategy with shorter hold times (a few days), and use of smaller positions since trends will be unpredictable. The VXX bias remains small meaning that the "edge" in trading these products is mostly gone for now, so trading these swings also requires a bit of luck as it ultimately becomes a guessing game for the next direction -- a strategy that is not usually profitable.

I'm inclined to keep a good amount of my portfolio in cash and put some money in ZIV where the price swings are smaller, as long as the bias forecast is positive and I can still get a decent roll yield.

Picking up some VXX here is very tempting as I think there is a good chance it heads higher over the next few months, but again I think in the short term it will see some wild swings so I prefer to wait until there is a positive bias behind it even if it means missing out on some of the gains.

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VXX Continues To Drive Upward

VIX and VXX continued their upward trend today with the VIX futures term structure flattening substantially, making it impossible for XIV and ZIV to make any upward progress.

We've been playing in the danger zone ever since the VXX Spike Risk gauge from our Daily Forecasts moved above 5.0 on 5/28, with VXX +16% since then. The flattening of the term structure today marks another possible shift in sentiment and puts the curve at risk of flipping to backwardation.

We're at a point where it is critical that...

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Members' Forum Now Available

Today I am happy to announce the addition of an integrated members' forum to the Trading Volatility subscriber site.

The Forum will make it possible for Trading Volatility+ subscribers to discuss, ask questions, and share knowledge and ideas about trading VIX-related products. By pooling our collective knowledge members can help each other to improve their trading skills and increase profitability.

I will also be using the forum as a venue to share my thoughts on the market to augment the updates I send to Trading Volatility Insiders. This will allow for more open conversations and serve as an archive for reference.

If you are currently a subscriber you can go directly to the Forum to sign up.

If you'd like to become a Trading Volatility+ subscriber you can do so at the Subscribe page. We are currently running discounts on new memberships through June 20th, 2013 as part of our launch celebration so join today!

See you on the Forum!

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