VIX Backwardates Slightly on Mild Pullback – VXX Trades

With the market finally showing some weakness after an unrelenting move higher over the last six weeks, the VIX has come off the 13 handle to almost 18. None of this is out of the ordinary, although the financial media acts like the world is falling every time the market takes any kind of a break. There always must be an explanation for a down day, and if they didn’t have Crimea or China to fall back on, they would find some rumor or bring out the bearish punditry to babble about fiat currencies or 1929 chart similarities. There is more BS and misinformation on CNBC than anywhere else unless you watch Fox News.

These pullbacks are opportunities to sell some vol, and there are plenty of ways to do that. First, the VIX curve provided buy

2014-03-16 17_05_00-VIX Term Structure

You can see the backwardation in the front of the curve and how the entire curve shifted higher over the past week. The VIX March future expires next week, so it will be in lockstep with the VIX at this point. The implied vol on the VIX options expiring Tuesday is through the roof:

2014-03-16 17_08_31-Main@thinkorswim [build 1856.11]

If you think things will not escalate in the next two days, or that there was a risk premium in the Crimean vote, then you can sell VIX call spreads that expire Tuesday and settle Wednesday morning. 19-21 would net around .25, and 18-20 would net around .50.

Another way to sell vol without having to look at you computer every 5 seconds, would be to sell VXX spreads out to March 28th or later. It is holding virtually all April futures right now, and that will be the front month come Wednesday morning. Here is the chain for March 28th, which is a bit off due to the weekend quoting being less than accurate:

2014-03-16 17_25_10-Main@thinkorswim [build 1856.11]

The 48-49 spread can be sold for about .30, and you have two weeks for things to calm down only slightly. If the market sells off to 1800 or below, than you can expect the VIX to approach 20 and the VXX can certainly rise 10-15%, sending the VXX to the 52 area. But even that will not last for very long as the faster the market falls, the faster it gets to real support. (Permabears can ignore that sentence, since we all know you think the SPX is going to 1000.) The key will be to roll this spread out before it’s too late and it widens. But if the VXX were to head to 52, I would be selling April 4 or 11 spreads over 55.

Other options of selling vol include selling put spreads on the ETF’s with elevated vol like IWM, FAS and TNA. You can get almost .50 for an 86/84 Mar 28th FAS put spread. You can also sell SPY put diagonals, taking advantage of heightened vol in the nearer options.

On April 10th, the VXST, or short-term 9-day rolling VIX based on SPX option volatility will give vol traders the ability to trade short term vol in an more efficient way than trading the monthly VIX options. I will discuss that more as we get closer to that date.

VXX 101 – Why it Doesn’t Move On Days Like Today

There hasn’t been much volatility to speak of, but that could change, especially as we get closer to May and June. As the market’s best season (November-April) is nearing an end, I decided to get back to posting once or twice a week, and more frequently if we experience higher vol levels. There really hasn’t been much to write about this year, frankly, without any political nonsense, taper panic, or Eurozone defaults. Kind of boring, right?

Today I want to go over the VXX structure again, since I endlessly see tweets from folks that are completely baffled by why the VXX doesn’t rise when the VIX rises or the market falls. These events are not mutually inclusive. The VIX can fall in a falling market, and frequently does after market events, like a highly feared/anticipated Fed meeting. Let’s look at the current VXX structure again for starters:

2014-03-11 20_23_19-S&P 500 Short Term Futures ETN _ VXX

After today, the VXX can only hold 25% of March futures, because it is only being traded for 5 more days. The VXX rolls every day. So the driver of the VXX is now the April future. Here is what the futures curve looks like:

2014-03-11 20_46_55-VIX Term Structure

The April VIX future barely moved today as you can see here:

2014-03-11 20_49_48-_VXJ4 - Quick Chart Main@thinkorswim [build 1856.8]

So there you have it. The April future moved up a measly 1%, and so did the VXX. Now, if the market really cared about the sell-off today, the VIX would have broken 15 to the upside. Without any conviction from those buying S&P puts (the basis for the VIX calculation), then the futures market is not going to take notice, and still has a considerable buffer of 1.2 built in: VIX future of 16.05 less VIX of 14.80. There is no fear or protection being demanded at the moment.

From an options perspective, there isn’t much to do in the VXX or UVXY. The future being 16 is too low to sell VXX calls and too high to sell VXX puts. We will sit and wait for a spike or a dip to get busy.

Volatility ETFs Ripe for a Holiday Trade – VXX and UVXY Roll About to Get Heavy

The VXX and UVXY are about to hold entirely the Dec contract and start rolling into Jan. The curve is quite steep:



On Wednesday morning, the VXX and UVXY will be selling each day 1/20th of their holdings in Dec and buying Jan. Right now, that presents a nice opportunity to be short these funds, for multiple reasons. First, the VIX tends to make an annual low in December. That is a 12.5% roll over the next 20 days at today’s prices. (16.15 – 14.31 = 1.84. 1.84 / 14.31 = .128 or 12.8%)

That divided by 20 days is .64% per day for the VXX or 1.28% per day for the UVXY. That is about 30 cents for each ETF roughly per day of negative roll yield. All things being equal, if the Dec and Jan contracts stay at their current prices, this will be subtracted from the ETFs’ indicative value, or their NAV.

You also get the bonus of Thanksgiving decay, one free day of roll without the market being open next week. So it really has to roll up in 19 days. This is a huge headwind.

What can you do to take advantage of this? Sell call spreads in both, so that your risk is capped in case there is a major market sell-off due to an unforeseen event.

Looking at the LiveVol option chain for UVXY:


If you anticipate that the UVXY will be less than 20 using the metrics above on the day after Thanksgiving, you can sell the $20-22 call spread for approximately .80. Your max risk is $2, but there is a ton of roll between now and then, and Thanksgiving week has a very bullish bias in the stock market.

You can do the same in the VXX, say at $47-49 for .60 or the $46-48 for .80 approximately. All you need for these to work is a flat market, so that the roll can do its job. If the market goes higher, the UVXY and VXX will get hit even harder as the Dec futures head lower.

Will Volatility/VIX Make a Return this Month?

There has been no volatility to speak of lately, so the posts here have been thin. While my focus therefore has been on specific name volatility arbitrage, (calendar IV spreads) there are hints that volatility may rise in the month ahead. Let’s examine why.

First let’s look at the S&P, NDX, and RUT charts (using SPY, QQQ, and IWM for volume profiling):

spy111 qqq111 iwm111

All three charts are very bearish, with MACDs rolling or crossing on every one. As you can see, MACD does not immediately turn around and head back higher until it resolves itself. It almost always leads to lower prices. Because uptrends do not reverse on a dime generally, (blow-offs aside) you get some chop at the top. That is what we are doing right now. But the canary in the coal mine may be the Russell 2000. It’s already only 2% above the 50 day after giving up 3% this week alone. Unlike the other indexes, it does not respect the 50 MA that much, unlike the S&P 500, which everyone watches like a hawk when it nears the 50.

The VIX during this chop is still dormant. While the media tone has slightly changed from “QE forever” to “QE taper in Jan, maybe”, folks are still not bidding up put options. They have reason to be complacent, November is a great month for stocks historically, #3, and when followed by great Seps and Octs, the chase usually is on to Dec 31st. But you more need buying, and there has been a ton of inflow lately to equity markets. The VIX may be lurking though, for at least an uptick:

vix111When the VIX sits down here, it takes 4-6 weeks generally for it to make an inevitable move higher. At least a move off of the 12-13 level. The good thing about the VIX being so low, is that you don’t have to pay much if you like downside options, anticipating a natural consolidation in stocks. One thing that works pretty well in this scenario are diagonal spreads. Let’s look at one example of how to get your risk/reward in asymmetrical shape.


This is the option ladder via the fantastic LiveVol platform. I like diagonal calendar spreads in this scenario. You would sell a nearer term put at one strike and buy another longer dated put at a lower strike, thereby lowering your cost and giving you the opportunity to make multiples on a market slide. One potential trade would be to sell the SPY $174 Nov 8 put for .40 cents and buy the Nov 15 $173 put for .56, for a net debit of .16. If the SPY stays flat or falls over the next two weeks, this trade will work and could be a big winner.

A rise in volatility will also juice the longer dated put as well. It is very hard to lose significantly on this trade. If the market stays right here next week, without even falling this trade will probably make 50%. If it falls to 174 next Friday, then you are looking at a 5x or more return, as the ATM puts for next week are worth around $1. That is without adding any vega to the put value.

Expect more posts in the coming week with vol trade set-ups.

Volatility is Alive, Even if the VIX is Dead for Now

It is entirely possible that the VIX and general market volatility remain subdued for the rest of the year. With so many managers underperforming the indexes, and lots of gold and bond money floating around, there could be a constant bid for stocks heading into year end. This is before any POMO consideration, which I think is over-rated in effectiveness, but has powerful psychological market implications.

I’m not predicting market direction, just surmising that there could be a line of folks looking for an entry, so pullbacks could be small. Thus, the VIX will not respect a falling market until it demonstrates an ability to violate widely watched levels, like the infamous 50 day moving average.

What to do for vol traders? Quite simply, there are always vol opportunities when you consider earnings and event driven trades. Short-term options reflect the potential for big moves, while the longer-term options reflect less volatility. Interestingly, for true vol fans, this concept is discussed by Jamie Mai in Hedge Fund Wizards, one of Jack Schwager’s great interview-style books. Jamie discusses why it is counter-intuitive that longer vol should be lower than short-term vol when the potential for major unknown event risk sits between the short options and the long options. Check it out for some fascinating reading.

A terrific platform for vol trading is LiveVol, and I have had the privilege of giving it a test drive over the last couple weeks. Vol traders will absolutely love this, it is built specifically for them. And earnings season is perfect for a platform build for setting up vol specific trades.

Let’s look at a specific example using NFLX:


The weekly implied volatility (circled) is 80 points higher than the January calls. This is an excellent opportunity to sell one against the other. When earnings are revealed, the short term IV will implode, while the long-term will fall at a much lower rate.

This is the trade I put on this morning:

Short NFLX weekly $380 for $7.26

Long NFLX Jan 2014 $380 for $17.81

Net debit $10.55

This was set around 10% out of the money when I put it on, and NFLX rose by 5% during the day and 9% after hours. I specifically set the short call 10% out of the money, as I felt I was getting a good value provided by short-term earnings traders. This trade had only about 50% of overnight downside, but has unlimited return potential.

AMZN, FB, and countless other weekly options provide this opportunity. So while the VIX is low, selling vol is still easy to do on an asymmetric risk/reward basis.

VIX Rises to Four Month High – VXX Now Rolling Positively as Backwardation Steepens

These are the times you should look forward to. People are starting to spend serious money on out of the money puts and pumping up the VIX. The low delta puts are catching a strong bid, and this is what gets the VIX surging. It has been a while since we’ve seen this, and it could go much higher. First, let’s look at the VIX weekly chart to get some perspective:


Realistically, we are not that high, in fact we are about average for an October VIX. Looking at past mini-crises in recent years, the VIX has been much higher. The last debt ceiling debacle saw a VIX of nearly 50. As recently as last December it was 23. So 19 is not that high, and this chart demonstrates that.

We have not had a real correction for over two years, so there are a lot of folks out there that have had nothing to fear for a long time. Add to that the consensus opinion that the government will come to a deal on Oct. 17th, and you have a recipe for a surprise. I’m not expecting a cataclysmic event either, but you must keep in mind what could go wrong.

This demonstrates how heavily bid the OTM puts were. Look at the low deltas as a percentage of put purchases on the SPY:


When the spot VIX and futures are in backwardation, the curve inverts and it is a cause to be wary. If you are short VIX futures for Oct, you should be sweating because the Oct future will get closer to spot as we approach the 15th, and that could be the height of concern:



This structure means that the VXX and UVXY are adding value as they roll into November, by purchasing cheaper futures (NOV) and selling more expensive ones (OCT). This is positive roll and for the VXX and UVXY it is rare. But this situation can certainly imply more equity market pain.

I’m getting itchy to sell vol, but it is not the time, because we are nowhere near a resolution, and a lot of index charts are implying more downside. The S&P broke the 50 SMA today, and the Russell 2k just gave a MACD cross lower sell signal. I’m literally sitting on my hands right here, but should there be a break in the logjam (doubtful this week, IMO), then I will be ready to act.


VIX Almost Touches 19 Intraday – Huge VIX Trade Setting Up

This will be the trade that makes your Christmas a nice one, and it is very basic. I will have more to say about this next week, but suffice it to say, I will be shorting the UVXY soon, and I will never cover the position, essentially evading capital gains tax. More to come. Meanwhile, the VIX curve has flattened out in a way that has been rare this year:



The VIX finally came alive, as the market really cascaded through obvious support levels on heavy volume. This is still not the time to sell vol unless you are very nimble. There will be plenty of time to sell it after the event risk ends and the volatility exhale commences.

I warned readers to be wary of selling vol recently, and those that ignored that are feeling some pain. Patience is key in finding the entry point. If you have to be early, save some selling power for a real scare. We may have two weeks to go before the optimal entry point presents itself.

Stay tuned. These are the opportunities you wait months for.

VIX Rises 7% – Spot VIX in Backwardation to VIX Futures

The headlines will say that the market sold off today, but in reality the futures brought down the opening marks which were then bid up most of the day. Tech stocks briefly went green and small caps (IWM) closed in positive territory. The consensus opinion is that the market will rocket higher as soon as D.C. makes a deal, and I must have heard the phrase “buy the dip” 100 times today. There aren’t many bears out there. I was also amazed at how many people were talking about selling volatility, as if there will never be a VIX over 17 again, and these pundits claimed it was a terrific opportunity to sell vol as there is no real market risk.

Someday these folks will learn the hard way that being blindly short volatility can have painful consequences, but it is anybody’s guess when that will be. A lot of today’s vol sellers haven’t seen the VIX really rip higher, it has become sort of a free lunch for them. The VIX futures did not respond commensurately to the rise of implied vol in the S&P puts, as October only rose 4.5%.


Obviously, VIX futures holders expect vol to fall quickly, regardless of the debt ceiling battle immediately behind this one. Even more consensus opinions claim that it is good that D.C. is battling now, because the losing party will not put up much of a fight in the debt ceiling deal.

Clearly, nobody expects anything bad to happen, in the media anyway. I am a bit more cautious and can wait to sell vol when either these things get cleared up or the price for vol goes high enough to compensate for risk. The momentum stocks, small caps and tech stocks have not corrected in the slightest bit, and that means that vol is too low for me to sell it now. Sure we could rip higher if some deal occurs, but you can sell vol for days after a vol exhale, you don’t necessarily have to put yourself out there being early.

It will be interesting to see if now that the quarter is over, some of these outperforming sectors will sell off a little, after they’ve been propped or painted into quarter end. Recall that October is #11 out of 12 for the Russell 2000 and vol has a history of rising into this month, we are now at day 25 on this chart:



Today was a great day, as I came in short Russell 2k and Nasdaq futures and covered them up early in the day. i was also short crude and covered that also. At the end of the day, when the almost traditional end of day spike arrived, I reshorted both, but this time my stops are quite tight due to the potential for some kind of resolution in D.C.

Seems to me that people are way too bullish and complacent right now. I will get long if the market tells me too, but I am currently more cautious than the crowd. There may be a much better opportunity to sell VXX and VIX call spreads in the weeks ahead, or maybe just get short VXX or UVXY. I will wait a bit and see what happens.

VIX Rises 10% – Spot VIX and October Future Converge

What was different about today that changed the volatility landscape? The S&P fell 7 points, but it has done that for 5 out of 6 days on low volume with the VIX turning a blind eye to all prior dips. The Nasdaq and Russell 2000 barely fell, and are right near their highs. It appears that the beta race by underperforming managers is on, and they will use the momentum names and small caps to desperately catch up.

Could this mean a big push into the end of the year? Quite possibly. But the street seems to know the future already, with everybody claiming the market will be bought at the infamous 50 day moving average. So they can see everything so clearly, a mild pullback as they wait for DC to inevitably compromise, then higher. When everybody is thinking the same thing, it makes me consider the alternatives, like the possibility of something unexpected.

The futures rose, and with over two weeks to expiration met spot VIX. In fact, the spot VIX was higher than the October future for part of the day. This is unusual, as the time premium usually has the future trading higher than spot VIX. Furthermore, the weekend sees spot VIX fall anticipating weekend decay in the options. So, while the VIX level is not high buy any means, it is starting to respect the potential for shenanigans in DC.


This was one of those days where new and uninformed VXX traders sit confused wondering why the VXX was not up 10%. At this point, the VXX is holding about 40% of the more expensive November future, and this will impede a move higher. The futures are not convinced of any real blow up in DC, but why should they be? Real volatility is a distant memory and a lot of folks have made bundles shorting vol. One of these days, this will burn a ton of people.

I closed the remaining Oct VIX $14 calls I had for 1.70, which was a nice return from $1.35 and $1.40. It obviously is too early to sell volatility here. I would be much more inclined to begin selling vol over 17.

If you think we’ve corrected somewhat in stocks, take a look at this chart:rut927

Or this one:


The indexes are basically at the highs. October is a challenging month historically, #8 for the nasdaq, #11 for the Russell 2000, and #7 for the S&P. In fact, the smart money is looking for this to change. The IWM, a proxy for the Russell 2000, saw 4x as many puts as calls trade today. This is an amazing ratio:


I have been short Russell 2000 futures for a couple days and I added a small short Nasdaq futures position as well. I will not fight these, and I will get stopped out on any move higher, period.

VIX and VXX Fall as Markets Remain Fearless

As the markets continue to act poorly for the fourth day in a row, participants are far from concerned as the VIX and futures fell. When the Russell 2000 rolled over in the last hour of the day, the VIX and VIX futures barely noticed:



If you look at the implied volatility in the SPY for example, you will see incredibly low numbers considering the fact that we have a DC debacle brewing, poor market behavior, and seasonal weakness as potential market headwinds. Check out the implied vols for this week and the quarterly options:


This is confusing, I must admit. I closed some October VIX $14 calls for a small profit at $1.55, ($1.35 and $1.40 entry) as I am not going to accept a vol exhale should something positive occur in DC over the weekend. I would much rather sell volatility instead of waiting for it to arrive, and I have seen enough to consider that it is possible it may not show up. No sense hoping, there will always be other opportunities, and selling vol is easier anyway.

The MACD is about to give a sell signal on the S&P, yet the NYMO has retreated to neutral levels. The Russell made an all-time intraday high today, and that signals to me that there could be a lot of folks out there chasing beta due to under-performance. Regardless of the technicals, the market itself is still very vulnerable to a surprise. The abundance of put selling in the SPY is something to watch. If the market falls, the delta hedge is selling the index, so it can sort of feed on itself.