VIX: Back to Context

In my last article on Seeking Alpha, which you can view here, we discussed the different types of events and how to interpret the context of what is happening.

Earlier last week someone asked me if this was a political or economic event. I quickly answered political because I believed the market moves were in response to The Fed and China. Then I got to thinking about it.

Why hasn't The Fed raised interest rates yet? The answer is slow growth.

The Fed has been trying, desperately, to get inflation going for an extended period of time. The results have been less than stellar but probably far better than if rates were raised two years ago.

In a world of increased globalization, many countries are finding it very hard to grow their way out of debt. If you look around at balance sheets, many countries are in positions where, if global inflation doesn't pick up, they are stuck. Greece is a prime example and will eventually revert back to its own currency or need debt forgiveness. They practically pawned their country out to the whole of Europe (mainly Germany) and now need to pay back funds that should be going towards growth, infrastructure, education, etc. I am not sticking up for them, because I believe that you reap what you sow. Years of mismanagement leads to those sorts of problems.

However, look at the U.S., our balance sheet isn't much better. However, our economy is. What if it wasn't? Guess what is on the chopping block: growth, infrastructure, and education. We still run deficits and will need to adjust the debt ceiling. It is just on the back burner because more important things are going on. The slower the growth (inflation) the larger this problem will become.


The VIX

Getting back to the VIX. I now believe this is turning into an economic event. Even though the U.S. economy is one of the better economies when looking at the globe, we are now interconnected more than ever. Disruptions in China will have ripple effects.

Should the VIX futures continue rise, I will start shopping for a position. However, it will be on a day to day basis and I really need to have a high reward potential for the level of current risk.

I would urge caution and risk management right now above everything else. Yes, you lose 100% of the chances you don't take. However, not losing is sometimes better than not winning.

Keep an eye out for my article on SeekingAlpha that should be published shortly. Have a great week!

Does The United States Oil ETF (USO) decay?

Since there is a lot of talk about oil lately, I thought I would do a piece on The United States Oil ETF (USO).

Recently this question was raised on StockTwits: Does USO decay?

If you have read my articles on volatility then you should be familiar with contango and backwardation. Commodity futures face the same types of futures curves, albeit more stable. Let's compare some prices charts to answer that question:

Here is the USO 1 year chart:

Here is the USO 5 year chart:

It is important to note that the spot crude price is a little behind on the first chart. 

If you take the difference between the spot price of crude and the performance of USO, it averages out to about 3% per year. The management fee in USO is 0.45% per year. 

Finally lets look at the max chart, USO began trading in April of 2006.

You don't have to be a rocket scientist to see that there is a divergence here. 

When using USO it would be best to plan this price decay into your investment objective. 

Outlook for oil

Many factors are currently at play here. China is building its reserves. U.S. drivers are driving more thanks to lower prices at the pump. Overall fuel economy continues to improve. Iran may now be able to sell their excess capacity on the open market. OPEC announced today that they don't expect production cuts.

With so much negative news, and very few positives, one might take a contrarian view here. It is my belief that someone is going to blink. We may experience more short-term pain before that happens. Ultimately capex spending will catch up to the supply side, which usually takes around six months. 

Before long we will begin to see supply level out and stability return to pricing. Oil companies can not run non-profits forever. Issuing large amounts of debts to pay dividends, not turning profits, and slashing capex spending will eventually weigh on supply. Most of the excess supply, in my opinion, is from everyone pumping to keep their heads above water. Once companies start to go under, expect consolidation. Consolidation leads to less competition, which in turn will lead to higher prices. The middle east relies on oil to fund social programs, and in the case of Saudi Arabia, massive programs. They are sitting on a pile of cash reserves. However, much of their budget is now being funded by reserves, that can't happen forever. Eventually a small pullback in production for a larger move in prices will make financial sense.  

The US Dollar is also a large part of this equation. A stronger dollar puts pressure on oil. The potential for raising of US interests rates is causing upward pressure on the dollar. An improving global economy could even out this effect. 

When will all this happen? That's the golden question. 

Just remember your holding costs when investing in any commodity fund, such as USO.

Best of luck!

The Current Volatility Situation and A Look Ahead

Hello everyone, I hope you have been doing well. We have seen many ups and downs with volatility over the last month. Here is a snapshot of the VIX Index.

In late June we saw the Greek drama unfold and present a very favorable shorting opportunity in the VIX. I initiated a position and exited when the VIX fell below 14. I did not expect that the VIX would touch 12. Better to be safe than sorry. It still proved to be a very profitable trade for me and I am happy with the results.

Greece still remains a wildcard for the future. I don't believe for a minute that they will be able to pay back the loan, given current conditions. I also don't know how they are going to jump start their economy without providing some sort of stimulus. Time will tell but for now Germany owns Greece.

Current Conditions

As you know, if you have followed me for any length of time, I am only looking to short volatility. Conditions remain too calm for this to have the proper reward to risk ratio for me. My advice would be as follows:

SVXY/XIV: Create some sort of stop loss or profit targets to exit your position.
UVXY/VXX: Avoid shorting as the choppiness in the VIX, and its current low position, make this rather risky. I always avoid long positions in these two.

Coming Up

Looking forward, I continue to predict increasing volatility for the remainder of 2015 and into 2016. Yellen has mentioned many times that it is the pace of rate increases, not the start that we should be concerned with. This leads me to believe that The Fed still finds September an appropriate time to increase rates.

We have some camps out there that believe The Fed will never increase rates. I don't know if I believe that but low rates could persist if economic conditions worsen. Economic data is currently mixed and skewed towards the positive side.

China should remain on your radar due to the spillover effects. People have been talking about the Chinese slowdown for years. By slowdown I am also talking about a crash or severe correction in their stock market. Is it finally happening? We will see. If it does happen, this will have a profound impact on the U.S. market. The global economy is now more interconnected than ever. One must be aware of the possible effects here at home.

This Blog

I received a comment on StockTwits that I should post daily updates on my blog. I think I should clarify why this blog was created. This is to supplement my SeekingAlpha library. Options strategies, general news, personal finance, and really anything else I want to write about will come here.

I am a school teacher and take my job and students seriously. During the school year it may be months before I post a new article or update this blog.

I believe in quality over quantity. If I updated this blog daily or posted daily I would essentially be no better than CNBC or any channel you tune in for financial news. It would be the latest headlines and nothing more. I think your time is more valuable than that and you are smart enough to know what is happening in the world on your own.

I make, on average, 2-5 trades in volatility per year. I have outlined the conditions that I look for in numerous SeekingAlpha articles. If you are watching the day to day swings in the market we have different trading styles and my writing just simply may not be for you.


The BEST thing to do would be to subscribe to this blog by email. Over the next few months, especially with the start of the new school year, I may publish 2-3 posts per month. These posts will be highly informative and filled with only what you need to know. No fluff, no daily news, just straight talk about what matters and when it matters. If an opportunity in the VIX presents itself, you can bet on me letting you know about it.

As always I appreciate you reading and I wish you a profitable end to 2015!