Sunday, September 20, 2015

UVXY performance in late 2008

This chart is part of something I am working on for SeekingAlpha. I thought you might find it interesting.

Have a great week!

Sunday, September 13, 2015

All Eyes On The Fed

Hello everyone,

It will be a big week for volatility. Judging by the price action, I see the market anticipating a delay in the hiking of rates.

I am sticking to the contango and backwardation strategy where you can find here.

There is always the possibility The Fed pushes ahead with the first rate increase on Thursday. Yellen has said time and time again during her monthly meetings that the timing of the first rate increase is unimportant but rather the pace at which rates return to a more normal range.

If U.S. economics and job growth remains strong, then I believe The Fed is out of reasons to keep delaying hikes.

If not Thursday then when? Will it be next month, December, next year? Eventually the market will have to handle the first rate increase.

If U.S. economics remain positive this will prove a very good time to enter into a short position in UVXY or a long position in XIV.

I am planning on initiating a small position in XIV after we enter contango. I will not be diving in as soon as it crosses the line unless we are beyond The Fed's decision.

Remember the contango and backwardation strategy isn't perfect but will protect you large losses. For more info and back testing please view the link above.

I hope you have a very profitable week and I look forward to getting back to contango.


Nathan Buehler

Monday, September 7, 2015

How Can Inverse Volatiltiy Products Still Rise During Backwardation?

Hello Everyone,

This is a question that has come up a lot recently and I wanted to do a short explanation here. I plan on doing a more extensive article on this later which will be featured on my SeekingAlpha page.

Let's say that currently VIX futures are in 7% backwardation.

If we break this down here is what affect that would have on an inverse volatility product:

  • 7% value loss over a period of one month as futures roll from the second to the front month contract. 
  • There are typically around 21 trading days per month. 
  • 7 divided by 21 equals 0.33%
Your daily drag from backwardation would average around 0.33%.

Now, let's say that the VIX futures (front and second month) fall 1% during the trading day. This would leave a theoretical gain of 0.67% minus any fees of the fund or deviations from the NAV. 

Long story short:

If the VIX futures fall faster than the rate of backwardation, inverse volatility products will go up. This is also true for long volatility products when volatility futures rise faster than the rate of contango.

I just wanted to clear up a common misconception I have seen lately. 

Have a great week. I should have an article published on SeekingAlpha either today or tomorrow.