Long in VXZThe VIX (red line) is near 52 its week lows. I went long on VIXM on 7/21/2016. After further research I found that VXZ has higher volumes (more liquidity). VXZ and VIXM do not decay as fast as the leveraged ETFs/ETNs. They also react more slowly, peak more slowly, and fall more slowly then the VIX and the short term ETFs/ETNs. Looking further back in time, shows that shows that VXZ and VIXM gradually decay over time. I do not understand the cause of this as they are not rebalanced. Perhaps there is a gradual loss of faith in them as a FIAT marker for the VIX (anyone who knows the correct reason, please comment/enlighten). Going long at 52 week lows may reduce the risk of medium term holds on this long position. This is a also a good black swan position. I am considering adding more long positions via VXZ.
VIXM_
Volatility Outlook (VIX) June 2016During periods of risk the VIX tends to get inverted- typically during times of stress this has stay inverted for quite some time, 6 weeks after last years shock valuation from China.
When this curve goes back to a normal upwards sloping curve, this is usually a very good sign.
The US equity markets has been pricing in the UK as an 'island', the risk of Brexit is enormous.
The problem is and this is where the options market gets it right, it's going to be like watching a really boring movie in slow motion.
There are not a lot of near time trading events from an options point of view, or a risk point of view.
Borris has taken himself out, how do you really trade that? there are not a lot of really tradable events in the near-term.
The end of quarter beta chase were not as important had be not had the Brexit and market been up 9% YTD
The volatility floor, globally will rise to a higher level - it really comes down to the political dynamics in the euro-zone, if these can be contained.
Update on VIX /VXV - Volatility contango intact but muted.Volatility traders over the last weeks have been seeing a "flattening" of volatility structure and have not been getting the returns they were expecting for contango trades. (If you want to see contango at work, pull up a 5 year chart of UVXY. Those losses? Contango.)
These charts show what is happening. The VIX (short term volatility) is rising from its depressed levels in late May while VXV (90 day volatility) is rising at a slower rate from a deeper fall in May. Why is that important? Remember that all of these volatility ETNs / ETFs have "roll." Roll is the daily sale of short term volatility and purchase of mid term volatility. Where do they get their supply of short term volatility to sell? From holding the mid term until it becomes short term. Just about any volatility symbol you can buy or sell employs such a strategy.
So how does that create a flattened volatility structure? Simple. On some days that the VIX spikes a bit, those short term volatility sales (purchased as mid term contracts weeks before, when the VXV was depressed too) are actually profitable. Normally there is loss due to theta and risk premium. But all futures players know that the key to winning is entering and exiting at a price move before theta and premium gets you. Well these ETFs are doing that on a few days here and there by pure luck. Most days theta and risk premium produce the deep contango that vol traders love. Do the math - as the VIX slowly rises so will the VXV, but if the VIX leads (which it is doing now) then there will be more days where those purchased-as-mid-term-and-sold-as-short-term vol contracts pay. Certainly not every day - just some days.
The structure is flattening also in part due to the volume of trades these ETFs / ETNs (and the array of HFT systems that arbitrage them and their underlying trades) generate. There is a "tail wagging the dog" effect that this volume has created that didn't exist when vol futures were only affected by OTM Put bidding on the S&P. More and more trades bypass OTM Puts and go straight to volatility. The VIX itself doesn't "see" those trades (partly why it is historically low and is likely to stay low.)
The VIX/VXV ratio chart on the left shows us this "flattening" as we touch that magic .9 threshold that induces backwardation fear. I placed an indicator underneath it that shows the contango rate movement of one of the highest volume vol ETNs out there - my fav of favs, UVXY. The orange line is the daily contango rate. A spike above 1 generally means the contracts rolled that day were at a profit and below at a loss. The white and black lines are smoothing functions. Notice the black line rising slightly but still under 1? That means one thing: Volatility contango is intact but muted.
The VIX will bounce around day to day and should continue rising such that we see spikes into 17s once in a while again. So there will be more days where the roll is a winner. But over all it remains a loser. Just look again at that 5 year UVXY chart.