$VXX will go down, it is only a matter of when

$VXX will go down, it is only a matter of when

 

$VXX will go down, it is only a matter of when.  That was a response to a Tweet on last night’s blog and I agree with it.  I don’t know how useful that is for generating trade ideas but history says it is right.  It might take 4 or 5 months but the general idea is that volatility will revert and drop to some long term average at some point.  Is it tradable and when?

There is a big distinction trading duration.  The first thing I learned trading was a 1 month option acts differently than a 6 month option.  Back then there were only 4 terms so it was not very complicated but it still mattered.  The Weekly and Daily option presents a granularity that was not available when I was a floor trader.  We had it one week a month for the gamma roulette when we could see how much curvature we would be short once expiration rolled around.  What is cool is the ability to short vol, not on a VIX time frame, but on a Weekly or 3 day time frame.  A better way to rephrase the Tweet is when IS volatility a 2 day sale or a 5 day sale OR a 30 day sale.  Even a 5 day buy for that matter.

Charts by LiveVol Pro from the CBOE

What we do have is 5 days of rising volatility futures on relatively light realized vol.  The joke on the Options Insider’s Option Block is that the dark side of the force has not revealed itself.  I think that is true but a very short term volatility sale seems to work well as in a well-constructed Index butterfly or 1 month volatility sales could work after the elections are over.  I am not sure about too much in between there.  The backward VIX makes a cheap call hedge in case the Dark Lord of Volatility reveals it’s true nature.

If you really want to understand this short term thing, take our Weeklys Class next Saturday.  If you don’t like it we will give you your money back.

Disclosure – VXX, SPX, VIX positions

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