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Hedging - VIX


alwaysinvert
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I use VXX and has been a disaster, I use it as an hedge - I must be losing %10+ of my profit last year using it.  :-\

 

I like it as a hedge because first, it doesn't expire; second, it will go up in value expeditiously if panic comes back.

 

However, I am seeking for more costing-effective way to own it. Like yesterday, I dropped almost 5%.  :'(

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the best way to protect against a market correction and an economic slowdown is via shorting an index or buying puts on an index.

 

VXX: the contengo is just too costly to absord and it is better in fact to profit from it by shorting VXX.

I also buy calls on VXX to limit maximum losses to 50% if VIX shoots much higher. The cost of thoses calls is about 15% annualized. I would prefer to buy calls on the VIX but the premiums are just way too high.

 

The profit you can make with the contango by shorting VXX is about 7-10%/month if VIX stay constant. Also by being right a few consecutive months, you are effectivively taking the lead because your short position will now be a smaller amount. A 10% increase on the VIX will correspond to a increase of less than 10% on your original position.   For me it is like time is on your side..     Does it make sense? well for me it does.

 

 

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the best way to protect against a market correction and an economic slowdown is via shorting an index or buying puts on an index.

But owning a VIX ETF would make you profit on big market moves in both ways, which of course, ceteris paribus, is more attractive than only on the downside. I'm not looking to short the market per se, I just thought that this maybe could offer a good risk/reward alternative to cash.

 

Regarding the contengo, I had suspicions of that being a great factor. It's too bad.

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I would wait for VIX to go pretty low (close to 10) and then the volatility on this index could be lower (if that's ever possible : volatility on a volatility index..)  then buying calls on VIX could be a good risk/reward bet.

 

But to me buying VXX is like throwing a football against a 100M/h headwind

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VXX: the contengo is just too costly to absord and it is better in fact to profit from it by shorting VXX.

I also buy calls on VXX to limit maximum losses to 50% if VIX shoots much higher. The cost of thoses calls is about 15% annualized. I would prefer to buy calls on the VIX but the premiums are just way too high.

 

 

I am also seriously considering employing the short VXX-long VXX call strategy.  I think the key is to determine the proper position sizing and to avoid the outlier event of volatility spike.  Your call buying seems to be a great hedge against VXX shorting.  Can you elaborate on the  VXX call you use and the reasoning: ITM/OTM, front-month/far-month, 1:1 ratio with the underlying?  Thanks,

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the best way to protect against a market correction and an economic slowdown is via shorting an index or buying puts on an index.

 

VXX: the contengo is just too costly to absord and it is better in fact to profit from it by shorting VXX.

I also buy calls on VXX to limit maximum losses to 50% if VIX shoots much higher. The cost of thoses calls is about 15% annualized. I would prefer to buy calls on the VIX but the premiums are just way too high.

 

The profit you can make with the contango by shorting VXX is about 7-10%/month if VIX stay constant. Also by being right a few consecutive months, you are effectivively taking the lead because your short position will now be a smaller amount. A 10% increase on the VIX will correspond to a increase of less than 10% on your original position.   For me it is like time is on your side..     Does it make sense? well for me it does.

 

 

 

Thanks - how did you find out the contango cost is about 7-10%?

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how did you find out the contango cost is about 7-10%?

 

I think this gives the future indices:

 

http://cfe.cboe.com/DelayedQuote/CFEFuturesSymbology.aspx

 

Also, the contango will become backwardization if volatility spikes too high.  If one data point is useful, last May, that transition seemed to happen about when the VIX hit the low/mid-30s.

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Can you elaborate on the  VXX call you use and the reasoning: ITM/OTM, front-month/far-month, 1:1 ratio with the underlying?

 

 

Well I am certainly no expert but I have been buying 5-6 month expiration calls with strike price about 50% higher than VXX price on a 1:1 #share basis ratio. Sometimes (like right now) I am short VXX without any call protection but on a small position of my portfolio.

 

 

 

 

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the best way to protect against a market correction and an economic slowdown is via shorting an index or buying puts on an index.

 

VXX: the contengo is just too costly to absord and it is better in fact to profit from it by shorting VXX.

I also buy calls on VXX to limit maximum losses to 50% if VIX shoots much higher. The cost of thoses calls is about 15% annualized. I would prefer to buy calls on the VIX but the premiums are just way too high.

 

The profit you can make with the contango by shorting VXX is about 7-10%/month if VIX stay constant. Also by being right a few consecutive months, you are effectivively taking the lead because your short position will now be a smaller amount. A 10% increase on the VIX will correspond to a increase of less than 10% on your original position.   For me it is like time is on your side..     Does it make sense? well for me it does.

 

 

 

Thanks - how did you find out the contango cost is about 7-10%?

 

Please realize that the VXX is a tradeable ETN and is not the VIX.  The VXX is based on VIX futures.  Its change in value in benign markets is mostly determined by the contango or backwardation of the VIX futures.  It's an esoteric derivative of the third degree.  It synthetically "buys" VIX futures more or less each trading day that are dated about one to two months in the future and "sells" them as time progresses and they become near dated.  

 

This is normally a loser's game and a sucker's bet because VIX futures are usually in contango, meaning that the futures that have a month or two before expiration are more expensive than the futures that have less than one month before expiration.  Therefore, the VXX quite often buys something that is 5% to10% more expensive than the price received when that future is sold one month closer to expiration.  

 

Occasionally, VIX futures shift into backwardation when near dated futures are more expensive than futures that are farther out.  This generally happens only when the stock market sells off or crashes, and stock funds pay extraordinary premiums for options to help protect the market value of their securities.  You can make a lot of money if you own the VXX when this happens because the price of the VXX will rise not only as a consequence of the favorable spread on the backwardation, but even more because of the rise in the prices of options in general that will be reflected in a spiking VIX.  But this is a loser's game unless you are truly skilled in predicting when the market will go bonkers.  

 

The only almost sure bet on the VXX is to short it after it has doubled or tripled and hold the position until the market becomes less volatile.  This is one of the very best bets in Optionsland because volatility will always regress to the mean unless there is a regime change like the end of the world.  :)

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I'd be careful with the VXX short.  Everybody and their mother is putting this trade on, from VIC to yahoo message boards.  It appears to be a free lunch and maybe it is but I think it's hard to calculate the odds of a huge spike in VIX.  I'd agree the key is to keep the position very small. 

 

In other news, I bought Feb VIX futures on IB this Friday at 18.35.  It was the first time I've ever bought VIX futures.  The market just feels way too complacent to me.  Jan Futures are 16.85 I believe so I am set to lose ~10% of my capital over the next 4 weeks if nothing happens - or more if the VIX keeps on falling. 

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To be honest, I get the big picture but not enough to short and like you said the cat is out of the bag.

 

I think Einhorn is correct and people complicate things too much. The easiest and most efficient way to hedge something if you have too much of it is to sell some of it.

 

Im not long or short any of these instruments and am too busy with all the cheap stocks out there.

 

With that said, I predict volitility on the downside in the not too distant future. If I am write I will run with this and if wrong, I am sure we all will forgot about it and have moved on to the next prediction  :)

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Can you elaborate on the  VXX call you use and the reasoning: ITM/OTM, front-month/far-month, 1:1 ratio with the underlying?

 

 

Well I am certainly no expert but I have been buying 5-6 month expiration calls with strike price about 50% higher than VXX price on a 1:1 #share basis ratio. Sometimes (like right now) I am short VXX without any call protection but on a small position of my portfolio.

 

 

Thanks.  I tend to think with low VIX value now is a good time to have tight call protection against the VXX short, but of course you have already limited your exposure by shrinking the position size.  Just my 2 cents.  ;)

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what about shorting the VIX and going long VXZ? If the market rises, you make money on the short but lose some being long the VXZ. However if the market falls, you lose on the short but recover some being long the VXZ? You adjust the ratio depending on your outlook......

 

cheers

Zorro

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  • 6 months later...
Guest Hester

VIX at 38 now, time to short VXX?

 

regards

rijk

 

If you've got the staying power and nootsack to be able to handle a further double or more from here, then the answer is yes. The VXX is doomed long term, but for some periods it can be in backwardation, and actually outperform the VIX. This could be early/mid 2008, the move before a gigantic spike, or early/mid 2010, after the BP spill where it spiked and went back down pretty fast. If you have the ability to stay for 3-5 years, then you will make 90% on your short before HTB fees. That's not the question. Whether you will have pain in beteen is the real question.

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agree the risk of "doubling" which happened in 2008/2009 and the psychological strength you need to handle that, is the biggest risk

 

there have only been 5 instances during the last 2 decades when the VIX exceeded 40

 

- may - jun 10 - peak 45

- sep 08 - may 09 - peak 80

- jul - oct 02 - peak 45

- sep - nov 01 - peak 45

- aug - oct 98 - peak 45

 

looks like a decent risk/reward if you want to benefit from market panick, as long as you enter > 40 and keep a modest position......

 

regards

rijk

 

 

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Guest Hester

Would being long XIV the safer bet?  I always worry about the termination clause though (termination when VIX futures spike >80% in a single day)

 

Right, the termination clause is an unacceptable tail risk in my opinion. Plus, going short the vxx is a good way of leveraging an otherwise all long portfolio. Say you're 100% invested in cheap stocks, taking a 5% short position in VXX eats up no capital and actually adds some capital if the broker allows reinvestment. But the XIV is perfectly acceptable.

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  • 4 years later...

This is an old thread. It was started on Jan 14,2011. On that date TVIX, Velocity Shares Daily 2x vix short term etn, was trading at about 50,000. It's now trading at about 11. VXX is down from about 600 to 25.

 

I started looking at these vix etf's after Lance posted he'd bought xiv, which is the inverse to vix.

I know this is an old idea, but it's new to me.

 

So my question - Why not short these vix etf's that obviously have a structural bias to lose value long term? The structural issue is explained in prior posts better than I could explain it so I won't try.

 

I know you can get hurt short term, but if the position is small enough that you can wait it out, this seems like a pretty good bet. They're down every year. And I know I'm looking at a short time span back only to2011. There's been three pages of discussion prior to this but I'm wondering if anyone has any new input. Before I get myself in trouble.

 

 

 

 

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So my question - Why not short these vix etf's that obviously have a structural bias to lose value long term? The structural issue is explained in prior posts better than I could explain it so I won't try.

 

I know you can get hurt short term, but if the position is small enough that you can wait it out, this seems like a pretty good bet. They're down every year. And I know I'm looking at a short time span back only to2011. There's been three pages of discussion prior to this but I'm wondering if anyone has any new input. Before I get myself in trouble.

 

So I think there are a few issues.  First, you actually need to be really confident in your strategy to do it.  I can't remember how much TVIX theoretically would have gone up in 2008, but it was large, like 25 or 50 times.  Second, at times like this, the contango becomes backwardization, so you'll be in the situation where you aren't only down 25 or 50 times, but you're also losing another 25% every month or so.  Finally, at those times, you have the borrow risk and the borrowing fees to worry about. The fees could be at 100% a year at that time, and the risk might be that your short shares get called back, and you can't find another borrow, so are forced to close out your short position.

 

So basically, you have to have balls of steel, and hope that you can maintain your borrow.  (I did something like shorting a UVXY $60 LEAP call when UVXY was under $20.  It wasn't pleasant when UVXY approached 60.  I think I lost 5 times my small, experimental bet when I closed it out in the mid-50s, though I would have made money if I had held on.)

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