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One of the problems with getting long volatility using volatility exchange traded products when the VIX is 10 is that they still hold a significant premium to spot VIX. And when vol is low and it has been low for a while, these ETPs and their options are stubborn to accept that vol may or will move higher. The market has reason to be skeptical, no mini-dip in recent times has turned into a majo-dip in as long as the new short-VXX-everyday geniuses can remember being on the short-vol gravy train to profits-apalooza.

That doesn’t mean that long vol traders need to sit there and suffer all the time. While you wait for the perma-bulls to take a pie in the face for a change and the short-vol tourists to try to wrangle out of their short UVXY leap calls for a 50% daily loss one day, you can make friends with theta’s evil step-brother…gamma.

Take today for example, a mere 9 point drop in the SPX did this to an option that was already in-the-money at the start of the day. If you wanted to be long some vol without paying for decay, you could have owned this Wednesday 2390 SPX put off and on all week and kept riding it to gains:

Meanwhile, this is what price action you got with a VXX in-the-money $14.5 put that expires Friday:

Not much meat on that bone, especially after paying your round trip fee and commission tickets to TD Ameritrade for 20 cent options. Because a VIX at 10 has SPX at-the-money options at 6 implied volatility, the gamma works fast, whereas VXX still has the futures near 12, a buffer of premium that is not kind to the long option deltas.

So, something to consider when you want to get long some vol cheap, do it the ole fashioned way and hit the indices up for a change.

It has been carnage in the long volatility ETP space this week (or pure delight being short these products or long inverse volatility ETPs) after the French election pollsters got it right and the VIX/futures immediate cratered to lows not seen since before the financial crisis. Here is a 5 day performance chart of a few major vol products:

But here is a scary thought- is it actually possible that you can be long these products and not expect to get killed? Maybe even make a few bucks on a down day? What a contrarian idea!

To answer that question, let’s examine what VXX is holding:

So with one week having gone by in the rolling cycle of VIX futures ETPs that hold the front month and roll into the second month, like VXX, it is approximately 1/4th June and 3/4ths May. So 75% of the performance of VXX is still tied to the May futures contract. The May and June contracts are currently priced 12.3 and 13.2 as we can see courtesy of @vixcentral.com:

One huge point to be aware of before we continue. Once about every 3-4 months the VIX rolling cycle, just like the options expiration cycle, experiences a 5 week roll. That is the case with June. June has 56 days to expiration.

So, let’s be realistic here for a moment. There just aren’t that many VIX settlements below 12. In fact, with all the record low realized volatility in the S&P 500 this year, the lowest settlement was 12.26 in February. In 2016, December expired in front of the major holidays at 11.15 and July settled at 11.62. So for the sake of this back-of-the-envelope math, 11 is really the lowest the VIX future can be expected to go. (Please don’t troll me if we print a 10.99 in May, anything is possible but you get the point here.)

If the front 2 months of VIX futures came off 10% tomorrow sending the May VIX future to 11.1 with 21 days to expiration, and June to 12 with 56 days to expiration, can we reasonably say that is about as far down as the futures can go in the short term (next 2-5 weeks)?

If you believe the rough math (don’t rely on my calculator, pull yours out), then VXX less 10% is $13.5 and UVXY at double that at -20% sends it to $12.10. That gives you something to shoot against. And the options know it too, the VXX May 19th $13.5 puts are a mere 7 cents!

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VA newsletter Apr24

This is a dynamic publication, always changing to accommodate the volatility topics and issues of the day facing the markets. It will also add sections that the readers feel need to be addressed.

Included with the subscription will be frequent nightly notes on volatility happenings, and the option to direct message me on twitter for questions and discussion on volatility topics and trading thoughts.

Below is a chart depicting the mean and median performance of the VIX going back to it’s inception in 1990. I prefer to focus on the median (most bloggers and media focus on the mean, which I believe is skewed higher due to enormous jumps during certain crises) to get an idea of where the midpoint of VIX data sits historically during the options expiration cycle:

As you can see, yesterday was clearly the median high point for volatility historically since 1990, and the market cheerfully obliged by selling off. Why does this happen? One can speculate using the Stock Traders Almanac, and simply looking at how the market tends to perform heading into the middle of November. From a common sense perspective, the majority of earnings have passed, the news is out, and the market tends to fatigue. Individual shorts can re-enter, without earnings risk being in the way. Institutional investors tend to buy on the first day of the month as well, supporting early November performance.

As readers of my former newsletter knew, this was one  of my superb tools for trading not only SPY options, but VXX, SVXY, and UVXY options as well. One key in the process of entering good risk/reward scenarios is to create a mosaic with a tool kit of excellent and proven data models, and this is an example.

This is far from predictive, no single historical data tool is. We could have an earthquake in California next week, (one of my bigger investing fears, btw) that would render this useless. But that is an entirely different point that strikes to risk management.