VIX, VIX ETPs and More

[theMist]

Very insightful articles regarding these two ETPs as well as SVXY, XIV.

sixfigureinvesting.com/2011/10/proshares-introduces-competitors-to-velocityshares-xiv-and-tvix/

sixfigureinvesting.com/2012/08/credit-risk-and-exchange-traded-notes/

sixfigureinvesting.com/2015/03/how-does-uvxy-work/

sixfigureinvesting.com/2015/10/how-does-tvix-work/

sixfigureinvesting.com/2016/10/is-shorting-uvxy-tvix-vxx-the-perfect-trade/

[theMist]

Walnut - read the articles I posted above, especially the commentary blogs underneath it.   Lot of really good Q&A regarding hedging strategies (call spreads, laddering).  Pretty smart guys over there at six figure investing, specifically Vance Harwood.  The only thing I disagree with them is that they don't believe TA is useful when playing TVIX, UVXY since they are not supply and demand driven.   I guess I'm determined to prove them wrong.  lol

Also, from what I understand (as you know), the only real danger of leaving on a short VXX, TVIX, UVXY position is the obvious black swan event or quick spikes which rarely happen intraday and usually happen over night or over the weekend.  My solution to this is to simply daytrade and I rarely hold positions overnight.  BUT, however, I do feel more comfortable leaving on long VIX SCAM positions overnight (at appropriate times (i.e., unfilled upside breakaway gap)) rather than short positions (for obvious reasons).  If you maintain a small VIX SCAM short position on at all times, you have to leave a ton of dry powder to stomach a possible 6X overnight move to the upside.   Also, I really don't see any really good hedging strategies (unless you can come up with a really good one) since premiums are so expensive and even selling them I think doesn't look advantageous.

Note:  Relatively minor corrections (i.e., 5 to 10%) in S&P tend to pump UYXY / TVIX up by a factor of 1.5x to 3x, larger corrections by a factor of 3x to 4.5x, Financial Crisis (2008-2009) factor of 15X.  

[theMist]

Also, need to mention:

If you ever decide to go long these VIX Scams for a Quick short term trade (not recommended for newbies) always use UVXY over TVIX. Don't use TVIX because it is an ETN. I doubt it will happen again but just in case they decide to suspend share count, the market value to NAV (premium) will balloon and collapse back down if they reissue. It happened back in 2012. TVIX collapsed approx 70% overnight and prompted quite a few lawsuits against Credit Suisse. See sixfigureinvesting.com/2012/03/how-to-vaporize-277-million-in-market-capitalization/.

However, both ETFs and ETNs can have share creation problems. The most common reason for it is commodity restrictions on position sizes (i.e., so you don't corner the market on some commodity). With volatility exchange traded products I would say that the ETNs are more likely to have the issue because their business model likely requires non-exchange traded products like variance swaps to be available at reasonable prices. If these swaps get expensive then the ETNs might lose money hedging the product or be exposed to excessive risk. The ETFs just need liquid VIX futures--and they seem to be liquid even during pretty stressful market situations.  I doubt there will be a repeat of the TVIX fiasco, Credit Suisse / Janus Capital has had multiple opportunities to kill TVIX by letting it fade to zero, but they keep reverse splitting it--so it must be worth the risk for them.

[walnut]

Yep thanks I will read through those.

And yeah I remember the TVIX scandal.

[theMist]

How to calculate the expected daily drop of VXX (or UVXY):

VXX and UVXY are based on *S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index")*.

VXX adjusts it's holdings on a daily basis to match this index.

You can check the current composition here: www.ipathetn.com/US/16/en/details.app?instrumentId=259118

as of 1-9-2017 the portfolio was 73% February futures contracts and 27% January futures contracts. The portfolio is adjusted so that it always has an average expiration of one month.

Feb contract is 14.45, Jan is 12.93, and Vix spot is 11.55

So, the January portion: ((12.93 - 11.55) / 12.93) = 10.7% drop, divided by 10 days left to expiration, which is 1.07 % per day.

February portion: ((14.45 - 12.93) / 14.45) = 10.5% drop, divided by 28 days which is the difference between these two contracts, .375% drop per day.

So, 1.07 daily drop x the weight of Jan component is .27 = .29% drop per day

.375 daily drop x the weight of the Feb component is .73 = .27% drop per day

.29 + .27 = .56% drop per day for the index.

Note: to get Jan and Feb weightings, go to following link: www.ipathetn.com/US/16/en/details.app?instrumentId=259118

click on "components" this was yesterday closing, today would have been a bit more Feb less Jan, you can do the math but it is going to be about the same anyway.


VXX mirrors the index, so the expected contango drop indicated this morning would have been .0056 x 21.80 = 12 cents

That drop is built into the daily price movement, even if the stock were to go up over the day.

But this is only an expected value, based on those prices at that moment. The vix index changes over the day and so the calculation is always changing, like contango.

And since the contango curve is not a straight line, this calculation would not capture the small degrees of change on the term line between the dates.

But this calculation should be close enough for practical use during trading.

[theMist]

Interesting Article regarding VIX, VIX ETP performance

vixandmore.blogspot.com/

vixandmore.blogspot.com/2016/12/the-year-in-vix-and-volatility-2016.html


Some interesting points that stood out when I read about the year in vix and volatility for 2016

"Checking the record books, the only previous year that the VIX posted three top 20 one-day declines was 2007 – and clearly investors were in denial that year".    We all know what happened at end of 2008-09.   lol

and

"While the year (2016) ended on a relatively quiet not, I suspect 2017 will have much more in the way of new surprises, including swans of many dark hues. Next week I will resume the VIX and More fear poll and find out what the consensus is for volatility and its causes in the coming year."

[huh]

Don't forget that late 2008/early 2009 were only the end of a bear market.

The market actually double-topped in July and October of 2007 ("coincidentally" almost immediately after the Roosevelt rules for protecting the markets from a crash were removed - for the reason that "they were no longer needed" - that happened in the summer of 2007)

By the time the infamous October '08 crash rolled around, the markets were already down nearly 30%.

[theMist]

Jan 18, 2017 23:45:43 GMT -5 huh said:

Don't forget that late 2008/early 2009 were only the end of a bear market.

The market actually double-topped in July and October of 2007 ("coincidentally" almost immediately after the Roosevelt rules for protecting the markets from a crash were removed - for the reason that "they were no longer needed" - that happened in the summer of 2007)

By the time the infamous October '08 crash rolled around, the markets were already down nearly 30%.

I hope your right Huh for longer term call.  I really do my friend.  I see the short term pullback coming and maybe I will start to see an even bigger topping process as you are calling.  Just don't see it yet.

I've been going back and forth with YMB and there are some really smart traders there and I'm trying to get them to come over to Fazination Proboards.  But some of them, even though they are very knowledgeable of how the VIX SCAMs work, I don't enjoy their company.   Some (not all) are proud, boastful, taunt, and make fun of those that have invested in TVIX or UVXY for long term and that have gotten crushed this entire year.  Instead of being compassionate and helping others they get caught up in foolish arguments and mock others.  I have posted many helpful insights on YMB to help others (i.e., vixcentral, prospectus link, contango v. backwardation, six figure investing articles, market to NAV, etc.).  I guess I do need to stop wasting my time over there.

Anyway, if we enter a MAJOR correction or enter a BEAR market, I think it will be a very humbling experience for them since the VIX SCAMS only came on the scene right after the 2008-09 crash and during this entire bull run and have never seen a BEAR market.  

According to Six Figure Investing -
Major correction of 2011 TVIX, UVXY, would have gone up 550%
Bear Market TVIX, UVXY would have gone up 15X

Could you imagine TVIX going from 6.50 to $100 ?!?!?   Try shorting that pop!  ROFLMAO

[huh]

VIX scams have sure lived up to their name the last few days, haven't they?

[theMist]

The best way to trade the VIX ETPs.  Let's assume TVIX.

1. Read and understand clearly the prospectus and then you realize what TVIX ETN is -- its simply a SCAM that's designed to go down over time and preys on unknowing investors.
2. Read all the articles on Six Figure Investing as well as vix and more blog so you understand all the dangers of shorting TVIX and understand how ETNs work
3. Have strong understanding of spot VIX, VIX Futures (contango v. backardation). Use Vixcentral.com as tool
4. Have strong TA skills when it comes to charting S&P, VXX, spot VIX -- and in that order of importance
5. Making the Trade and Manage Risk (this is extremely important and is a entire teaching all unto itself) -- Decide your trading approach to shorting TVIX -- long term, short term, daytrading...

I may have left out a point or two BUT after you've gained a full knowledge of all of the above, after awhile you should learn to have really good trading judgement and that comes with experience.
And in the end, having good trading judgment and making successful trades is all that really matters.

Hope this helps anyone considering trading volatility

[walnut]

I've done well but I am weak on #4

[theMist]

bumping up thread