January Trade Performance +13.35%

I posted two VIX futures ETF trades in January netting a total of +13.35%. These trades were:

1) Parallel trades of XIV and ZIV for +8% and +5.5%, for an average return of 6.75%. (Open & Close)
2) VXX trade for 6.6% (Open & Close)

Closing Position in VXX

I just sold to close out my VXX position that I opened last Wednesday for a gain of 6.6%. Closing price was $24.19. VXX is likely to retreat a bit the rest of today, assuming the broader market (S&P 500) moves sideways.


With 21-period Historical Volatility (HV21) for SPY looking to close under 10 today and front month VIX futures at 15.15, a long position in XIV seems to be a much better play at the moment.

If you'd like to see current SPY historical volatility values you can go to my VIX Futures Data page.

Free Historical Volatility and Other VIX Futures Data

I've decided to publish some critical data for anyone who trades volatility ETPs on the VIX Futures Data page of my blog. This includes the price of  the first seven months of VIX futures, historical volatility (10, 21, 30, and 63 periods), some key VIX metrics, and prices for the most common VIX ETPs (XIV, ZIV, and VXX).  Note that all data is delayed ~10 minutes.

Most services charge a fee for historical volatility, which to me seems a bit goofy since it is a really straight forward operation.  The following is the HV calculation in case you are interested:

1) Return, where P_t is close price on day t.

2) Average day-to-day changes over n-day period can be calculated as sum of returns divided on the number of days: 

3) Daily historical volatility is calculated on the basis of n days is estimated as


4) Annualized Historical Volatility is calculated as HV=HVdaily*sqrt(252)


Additionally, the five-month chart of VIX futures that I wrote about on Saturday does update dynamically so you can check that at any time on the same page. I think it's probably too valuable to just give away so this may change in the future.

Why VXX is Such a Killer (Five-Months View of VIX Futures Data)

I thought it might be helpful to some readers to see a snippet of the vast amounts of data I track and analyze in my pursuit of developing the strongest possible volatility trading system I can build. Therefore, I've added a VIX Futures Data tab on my website which plots out the most recent 5 months of VIX and VIX Futures data in to an interactive chart (while I have data going back to 2004 in Excel, I'm not quite sure Google Docs can handle it).

Since the graph on the website uses flash, I've included a static image in this post so that it can be visible in your emails and RSS feed.

This graph shows the closing daily values of the spot VIX and the first 7 months over the course of the last five months. If you've never seen the VIX futures plotted out like this, allow me to point a few things out.

1) Contango, the condition in which contracts for near term months are less expensive than contracts further out in the future, is clearly visible at most points. On Nov 23rd, for example, Dec contracts are cheaper than Jan, which are cheaper than Feb, which are cheaper than March, and so on.

2) Last day of the roll period. The veritcal lines in the middle of each month indicates a monthly contract has expired. At this point, all months advance forward one month (2nd month becomes the 1st month, 3rd becomes the 2nd, etc) and you can see a new 7th month added into the mix (towards the high side of the graph). Try following the purple line - where does it go? The constant rolling of VIX futures during contango, despite a mostly sideways spot VIX, is what causes VXX and UVXY to lose so much money (and inverse products such as XIV and ZIV to gain so much).

3) Compression.  We've come a long way in five months.  In late August 2012 it was hard for front month futures (light blue line) to get below 19.  Fast forward to today and you can see that seven months of futures are below 19 and have compressed to less than 5 points, something that hasnt happened since mid-2007. In other words, the market has priced in very little volatility between now and August 2013. Think about what the current level of compression says about the future price movement of XIV, VXX, and ZIV.

I'm hoping this graph will update dynamically but I'll have to wait until Monday to know for sure.  In the meantime, let me know what you think.

VIX Futures Weekly Wrap

We saw an unusual week of positive correlation between VIX (+3.5%) and SPY (+1.3%), a continuation of a daily occurrence of positive correlation that I identified last week.  Early in the week we also saw VIX hit its lowest close since 4/20/2007 at 12.43 before heading higher over the rest of the week.

VIX Futures Weekly Performance:

Feb-13	Mar-13	Apr-13	May-13	Jun-13	Jul-13	Aug-13
-4.1%	-7.4%	-6.7%	-5.9%	-5.7%	-5.5%	-5.3%

Front month (February), down 4.1% to 14.05, was not able to match the losses experienced by other months despite pressing down to new multi-year lows of 13.65. This resulted in a flattening of the front side of the term structure curve, reducing the negative roll yield of VXX.

Based on these changing conditions and other indicators I established a long position in VXX at $22.70 near the close on Wednesday and I continue to hold it, although I will likely ditch it Monday if it doesn't get going.

Weekly scoreboard for VIX Futures ETPs vs S&P500:
- XIV: +4.2%
- ZIV +6.4%
- SPY: +1.3%

And the daily close of the VIX Futures term structure this week:

New Position in VXX

I've opened a new position in VXX just now at $22.70 which I plan to hold for a day or two.

This is a more speculative trade than normal, with my VIX futures indicators showing only about a 70% success rate. I've set up a stop at $21.60.

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DISCLAIMER: I am not a licensed investment adviser. Trading of securities, options and futures may not be suitable for all individuals and involves the risk of losing part or all of your money. It is important to do your own analysis and accept full responsibility for any investment decisions you make. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities.

Daily Divergence in VIX-SPY Correlation

Today the market experienced a divergence in the typical negative correlation between SPY and short-dated VIX, with SPY +0.65%, VIX +1.1%, and front month VIX futures +1.3%.  This often happens when the SPY hits new relative highs (a 5-year high for SPY in this case) as traders start buying protective puts to lock in gains, and around options expiration days (tomorrow).

From here we're likely to see more buying of short-dated VIX over the next few days as it continues to adjust, as I wrote about two days ago. This would result in a lower XIV and higher VXX. I don't typically recommend buying VXX and holding it overnight, so at this point I'm just looking for my signal to buy back XIV at a lower price.

Closing Positions in ZIV and XIV

This afternoon I closed out my positions in XIV and ZIV that I established on 1/3/13 for gains of 8% and 5.5%, respectively.  Nothing all that amazing but not a bad way to start off the year either.

The conditions of underlying VIX futures for these products indicate the approach of a top in the short term so I'm taking profits and waiting for the market to adjust over the next several days.

Secrets of VXX: Convergence of Front Month VIX and Spot VIX at Expiration Date

VXX (-1.6%) was down moderately today in a move that may look abnormal considering the moves in spot VIX (+1.2%) and SPY (-0.07%). However it's not unusual at this point in the VIX futures cycle and today I'll explain the mechanics behind this move.

First, remember that VIX futures are a measure of the expected 30-day implied volatility on the expiration date for a given month and that spot VIX is the current 30-day measure of volatility, as explained here.  Since January VIX futures expire tomorrow you can expect these two values to converge as we approach expiration day.

As of Friday the January futures were nearly 6% higher that spot VIX.  What we saw today was the convergence of these two points. Falling front month futures drove VXX down and XIV up. By the end of most VIX futures expiration days you can expect front month futures and spot VIX to be within 2-3% of each other (at the close today that gap was down to 4%).

There is, of course, no guarantee that VXX will go lower in the days before expiration.  Consider the scenario of a sharper rise in VIX. Front month futures still need to converge toward spot VIX at expiration but since front month futures start with a 6% buffer above spot VIX (in this case) you can expect any upward move in VXX to be muted.

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Disclosure: Short VXX; Long XIV

VIX Futures Weekly Wrap

Generally a bit of a slow week with the market continuing to drift higher after the big move up last week.  Traders continued to unload option protection along the entire curve, with spot VIX closing at a 67-month low of 13.36.

VIX Futures Weekly Performance:

Jan-13	Feb-13	Mar-13	Apr-13	May-13	Jun-13	Jul-13
-7.2%	-3.9%	-2.2%	-1.6%	-2.6%	-2.7%	-2.8%

Front month (January), down 7.2% to 14.15, saw the heaviest selling and dropped to the lowest close for front month VIX futures since 6/19/2007. January futures expire next Tuesday at which point short term VIX ETPs (XIV, SVXY, VXX, UVXY) will start to use February as front month futures, which will help fuel XIV/SVXY.

March futures and beyond fell a slightly, with the back end of the curve compressing a bit, decreasing the roll yield and making ZIV a little less attractive in the short term.

A look at the VIX futures weekly performance vs SPY:

• XIV: +3.9%
• ZIV: +1.9%
• SPY: +0.5%

Finally, the VIX futures term structure at the end of each day this week:

Predicting Market Sell-Offs Using the Premium of Front Month VIX Futures Over Spot VIX

Contrary to what many may think, crashes in the stock market do not just suddenly happen without warning. Subprime crash, flash crash, 2011 debt ceiling -- all of these events were preceded by existing weakness in the market prior to an actual crash event.  While it is impossible to predict when the market will fall, this measure can be used as a signal to indicate that the market is on edge, where one of many possible events can trigger a downdraft.  (There is an excellent read from Mark Buchanan (Ubiquity: Why Catastrophes Happen) which goes into depth on the topic of how something seemingly small triggers larger chain reactions.)

One of the signals that I use to determine when there is tension building in the market for a decline is to look at where front month VIX futures are in relation to the spot VIX. For reasons I will describe below, a positive premium of front month (M1) over spot VIX normally exists and converges over time. Abnormalities of this behavior indicate shifting investor sentiment.

The first concept to understand is that while spot VIX is the current 30-day measure of implied volatility of SPX options, VIX futures are the measure of the expected implied volatility on the expiration date for a given month. This means that the front month VIX futures is further out in the future than the spot VIX. Once the expiration date for the front month is reached it expires and VIX futures roll over to use the next month as front month.

The second concept is that the prices for each month of VIX futures create a curve called the term structure (you can see a visualization of the term structure in my previous post here). Normally the term structure is shaped such that VIX futures that are further out are more expensive than nearer months, a condition known as contango.  

By combining these two concepts you can see that there is usually a premium of M1 over spot VIX since M1 is further out in in the future than spot VIX and the term structure is in contango. Now since spot VIX in a constant 30-day measure of volatility and M1 is forward implied volatility on a fixed day for the next month, the amount of premium gradually decreases as we approach the expiration date.  

The chart below provides a 55 month view of the daily reading of the percentage of M1 above (or below) spot VIX. Note the periods circled in red where the value go briefly and shallowly negative followed by a spike downwards where VIX becomes much larger than M1 as the markets sell off and traders drive up the value of the spot VIX. This can be contrasted by the more confident periods in which spot VIX remains below M1 for a prolonged duration indicating a more confident market (see green "floors").

The downdrafts identified on the charts started on the following dates:

1) 9/9/2008 (subprime crash)

2) 5/6/2010 (flash crash/Greece debt problems)

3) 3/16/2011 (Libya skirmish)

4) 7/27/2011 (Debt ceiling crash)
5) TBD

As you can see, the market provides useful signals when sentiment is changing and is starting to get unstable. As market sentiment changes for the worse, you will see a gradual change in the term structure where the spot VIX rises above front month futures, a condition defined as backwardation.  There will be occasional periods of slight backwardation before a more pronounced upward move in the spot VIX which is typically accompanied by a marked downturn in the market (S&P 500). 

These movements are not just a coincidence -- it explains investor sentiment. When the general market is doing well, investors tend to get complacent and expect that it will continue to do well.  They continue to add to long positions (often with leverage) and do not have much interest in buying and holding options for protection. However these brief dips into backwardation suggest that options are underpriced and rise after a series of events remind investors of broad market risk. They start buying protective puts -- initially in smaller quantities and holding only briefly, followed eventually by broad buying of protection driving up both spot VIX and VIX futures as market risk materializes.

For VIX traders out there this means that there is an increased risk with long XIV positions and extra caution is warranted in the coming month(s).

New Positions in XIV and ZIV

The big early gains in the market held up well today and we rallied in to the close. I opened a small position in XIV at $18.39.  I will look to pick up more XIV and also buy ZIV over the next day or two, hopefully closer to $18 (XIV) and $24.5 (ZIV).


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DISCLAIMER: I am not a licensed investment adviser. Trading of securities, options and futures may not be suitable for all individuals and involves the risk of losing part or all of your money.  It is important to do your own analysis and accept full responsibility for any investment decisions you make. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2012-2013 Jay Wolberg. All rights reserved.

"VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owners or operators. 

Adverse Effects of ETPs Which Replicate Daily Returns of an Index

Happy New Year!

Before I get to VIX topics, today we kick off 2013 with passage of the "American Taxpayer Relief Act of 2012" which maintains the current income tax rate structure except for individuals making more than $400k/year. Somewhat counter to the name of the bill, everyone will see their taxes rise as payroll taxes increase revert back to 6.2% from 4.2% and additional taxes are withheld to fund the Affordable Care Act (AKA Obamacare).   You can read the entire text of the bill here.

All in all, the bill's provisions closed the U.S.'s $1,089 Billion annual deficit by $62B and taxes are still going up for all Americans. It increases the chances for a U.S. credit ratings downgrade in the next couple months and will create a slight drag on GDP for 2013.

While I was enjoying some vacation over the past couple of weeks the markets experienced a 27% round trip move in VIX, moving from 17.84 to 22.72 and back (now at 15.31 as I write this).  Volatility ETPs have been choppy since I made my exit from XIV on 12/11. Remember that these ETPs return the daily change of an underlying index. The adverse effects of ETPs which replicate daily performance returns of an index in a choppy market are apparent over this period:

• VXX (short-term VIX futures): -0.35%
• UVXY (2x short-term VIX futures): -8.3%.
• XIV (inverse short-term VIX futures):  -7.4% 

Conditions for trading VIX ETPs remain a bit rough at this time. Stay tuned for VIX trades as the day and year unfold.