NaughtyPines

LOOK TO VIX LEVELS TO PLAY VXX, UVXY LONG

INDEX:VIX   CBOE Volatility Index
One of the other things I'm watching next week (and, in fact, that I look at daily) is the VIX             . With VIX             at 14.02, a sub-12 "fearlessness level" is within striking distance, so I'm looking to add to my long volatility position in here somewhere, assuming the price is right. The VIX             bottom is not particularly "clean," but historically the low volatility periods are marked by a low range between 14 and 11.

When going long volatility, you're naturally not limited to going long VIX             . You can also go long VXX             , long UVXY             , or short SVXY             (an inverse). But when you compare and contrast the charts of VIX             , VXX             , and UVXY             , something appears markedly "goofy" with the VXX             and UVXY             charts. That "goofiness" arises from cycles of backwardation and contango (mostly contango) and, as a result, the VXX             and UVXY             "bottoms" are somewhat fuzzier and more ill-defined than those of the pure fear index , the VIX             .

Because of this "bottom fuzziness" in VXX             and UVXY             due to contango/backwardation, I use the VIX             as my bottom guide if, for some reason, I'm not going to play VIX             options to go long volatility, but opt to go long in VXX             or UVXY             instead (my general preference is to use VXX             over UVXY             if I'm not using VIX             options; UVXY             bid/ask spreads can frequently be grotesquely wide, making it difficult to get a fill at a "fair" price). When the VIX             reaches the price I'm looking for, I then turn to the VIX             derivative product and look at setups for taking advantage of VIX             bottoming, such as a short put credit spread or a synthetic covered call.

So, you might be asking, "Why don't I short SVXY             using options?" SVXY             is an inverse volatility product, which means as VIX             increases, SVXY             declines and vice versa. Unfortunately, these volatility products have their own volatility. As SVXY             declines, its volatility increases, so you may find your short call setup treading water as SVXY             declines because, as it does so, its volatility increases, which affects the price of its options.

Moreover, SVXY             -- as an inverse VIX             derivative -- suffers from "inverse contango", which means that, generally, over time, its price will increase to infinity, assuming that "contango" is a constant push on its price. You'll notice that SVXY             has had to reverse split a couple of times to accommodate this "inverse contango". Consequently, it's just more effective to go long volatility in the long volatility products, VIX             , VXX             , or UVXY             .
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