With the uncommon Spike in VIX and expectation the VIX level will not be maintained long, I just bought XIV, expecting it should trade higher in the weeks/months ahead, rather than selling premium with options. I am in no hurry for this to be profitable, but expect the odds are good for this to be profitable in a week or so, and may get a sweet exit point (40-ish) before year end. Any advice on why I should not have taken this trade, and any "bears behind the trees" I have failed to see? (I have not traded XIV before, as it seems attractive only when we have these big VIX moves.)
Alternate to selling premium?
- Thread starter stepandfetchit
- Start date
The only initiating play (besides sitting in cash) on the board the last few days is short puts on anything bullish (or some other less costly version of that trade).
My scans were returning an insane amount of choices for bullish plays, it was a gift from the gods, you had your pick of the litter.
If you think we crash, stay in cash (and hold on to pre-existing short positions). I don't see crash based on how bonds etc. are currently behaving but of course that could change.
I went scooping Monday and now I wait for a nice rebound to sell some calls and get neutral again, your mileage may vary...
Can it go down here? Sure. Would you have been wise to initiate short calls the last 3 days? I would suggest no. Risk/reward currently favors either a snap-back rally or consolidation.
My scans were returning an insane amount of choices for bullish plays, it was a gift from the gods, you had your pick of the litter.
If you think we crash, stay in cash (and hold on to pre-existing short positions). I don't see crash based on how bonds etc. are currently behaving but of course that could change.
I went scooping Monday and now I wait for a nice rebound to sell some calls and get neutral again, your mileage may vary...
Can it go down here? Sure. Would you have been wise to initiate short calls the last 3 days? I would suggest no. Risk/reward currently favors either a snap-back rally or consolidation.
on seeking alpha and stocktwits there are some good discussions on the vix related etfs and etns, make sure you are clear on contango and backwardation, I got burned bad on selling puts on svxy, had a couple of good trades, and then got careless, so I am trying to dig out of a big hole.
You're right that a decline in VIX should help your XIV position, but probably not in the way you expect. @traderlux has it right.
Because the volatility products hold and roll futures contracts, they benefit or get hurt from the structure of the futures. Right now the term structure of the VIX futures is in Backwardation. What that means is that futures contracts further out in time are trading at price lower than the front month and below the spot. As a result, longer dated months creep up the curve as they approach expiration and that helps the long vol products. Basically, the long vol ETF's have a natural advantage (think VXX) while the short vol ETF's have a natural disadvantage.
I think it's easier to think about the issue in reverse. You know how normally VXX seems like the worst thing you could ever buy because it seems to endlessly decline in price? The reason is that VIX futures spend most of their time in Contango where the back months are trading at a premium to the front month. When VXX rolls the contracts, it's buying more expensive vol that deteriorates as it approaches expiration.
XIV could be good thing to be long, but it's going to be a more effective long when the futures are back in Contango. There's more at play than VIX up or VIX down.
Because the volatility products hold and roll futures contracts, they benefit or get hurt from the structure of the futures. Right now the term structure of the VIX futures is in Backwardation. What that means is that futures contracts further out in time are trading at price lower than the front month and below the spot. As a result, longer dated months creep up the curve as they approach expiration and that helps the long vol products. Basically, the long vol ETF's have a natural advantage (think VXX) while the short vol ETF's have a natural disadvantage.
I think it's easier to think about the issue in reverse. You know how normally VXX seems like the worst thing you could ever buy because it seems to endlessly decline in price? The reason is that VIX futures spend most of their time in Contango where the back months are trading at a premium to the front month. When VXX rolls the contracts, it's buying more expensive vol that deteriorates as it approaches expiration.
XIV could be good thing to be long, but it's going to be a more effective long when the futures are back in Contango. There's more at play than VIX up or VIX down.
So true. I always read the ET threads on these volatility products and try and get some inspiration from them, but it all goes way over my head. I often wonder how many people on ET actually understand them? - very few it appears.
