# holding the VIX noob question



## rusty23 (Jan 25, 2012)

had a friend tell me that since the vix is so low no compared to it's historical average that now would be a good time to buy and ETF that tracks the VIX (HUV) for a short term hold (couple months). BC with Iran/EURO/US we are nowhere safe. Now I hear from most experts that this is not a good idea to hold the VIX for various reason as in this article 

http://m.theglobeandmail.com/globe-...ous-investment/article2164799/?service=mobile


Now i understand the big swings but what i don't understand is this comment:

"These funds are continuously rolling their positions in volatility futures. Short-term funds seek a maturity of only one month. Funds that track the VIX Mid-Term Index, such as the ProShares VIX Mid-Term Futures ETF, have an average maturity of five months. In either case, the constant buying and selling eats away at the investment because, in most cases, the new contract is more expensive than the last.
The iPath S&P 500 VIX Short-Term Futures ETN rolls one-30th of its approximately $1-billion portfolio every day. Over the past three years this has led to an annualized loss of the underlying asset of more than 50 per cent, Mr. Strauts said."

Can someone tell me in layman's terms what it would mean if one was to say put $5000 to hold HUV if the positions in the etf keeps rolling over? Or if someone could direct me to where i could read more about this?

Thanks trying to learn a bit every day


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## ddkay (Nov 20, 2010)

There has been no confirmation downside yet, the S&P has only had one 1% down day all year.. this is the most extreme bull market in 40 years. long VIX is the fastest way to go broke, but shorting VIX has been obscenely profitable (just don't get stuck with a fund that halted share creation like TVIX - that's less supply/demand and more manipulation). Inversely correlated stocks like BAC (for now at least, not always) are also good and you can go long w/ unlimited upside, whereas profit on a short is limited to 100%.

P.S. it's not at historical lows even though it may be below historical average. Spot VIX was 9.39 in 2007, while the 2012 low was a lofty 13.66. Hard to believe, but it can go lower...


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## amps (Feb 2, 2012)

I just started out with the VIX and started with the same mindset that you're describing. The only difference is I listened to the exact same arguments a month ago. End result was I went down nearly 30% in a very short period of time before reversing my position.

I'm now short UXVY (double leveraged VIX futures, similar to TVIX) and have swung back 39% in a weeks time. 

My feeling is this: Follow the trend. Deciding the buy into the VIX is deciding that the market has peaked and is imminent danger of pulling back. Past history shows that trying to pick bottoms or tops is usually a fools game. If you really feel the trend in the markets is about to change, go for it. If you aren't sure what's going to happen, then stay out until a clearer picture presents itself. For me, I'm going to continue to ride the trend as far as it goes, all the while setting stop-limits along the way to hold onto my profits.

The BEST blog for reading about this is http://vixandmore.blogspot.ca/

The author has been shorting VIX products for months and gives excellent explanations as to why and how the products move.


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## andrewf (Mar 1, 2010)

I would not recommend long VIX positions. It is very difficult to time VIX spikes, and the market will ruthlessly destroy you while you wait. Contango between the front month and second month VIX futures has been extremely steep (over 30% roll cost) for the last month or so, meaning that if a long VIX position through an ETP like VXX would lose 30% of its value if the VIX stays at the same level for a month, never mind falling as it has been. 

On Feb 10 I bought 2 puts Jan 2013 $30 strike for VXX @ 8.80, while today they are worth about $14.50 (65% gain in 5 or 6 weeks). Needless to say, the performance of VXX has exceeded my expectations (I was expecting a 65% gain by November or December). I redeemed myself somewhat on calling XIV too early in the fall by 'averaging down' (I don't like that term) in December.

My experience is that you should be humble and cautious when trading VIX products. There are definitely some great returns, but you should expect the unexpected and have a plan in place for major corrections. This market is very volatile so you don't have days to mull your decision. I'm sticking to longer term momentum strategies and harvesting contango in the futures market. I don't think I'll take any long positions on VIX, only short/flat, or perhaps hedges (VIX options further out on the curve, etc.).

UVXY just started trading options, which is interesting news. I'll have to watch and compare premiums to VXX, which is currently more liquid.


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## Argonaut (Dec 7, 2010)

I wanted to sell some calls in VXX back in the fall but never got around to it. Silly. 

For those with some margin to burn, it's a good idea. Worst case Ontario, you're short VXX which isn't a bad thing in the long run.


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## ddkay (Nov 20, 2010)

VIX is likely to spike today, below S&P 1370 I think this would be a good short term hold.

If you were short VIX it's time to puke the position, don't like the R/R anymore.

Funny how "things" change over night eh.

Mutual funds haven't had net inflows for months, cash levels are at all time lows, warning signs have been flashing just a matter of time...


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## andrewf (Mar 1, 2010)

VIX is up today. Hardly a 'spike'. (I would define a 'spike' as when the VIX futures term structure goes into backwardation, which is just about the only time people who hold VXX get decent returns)


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## ddkay (Nov 20, 2010)

It's a spike to me since I look at a much shorter time frame.. but long term yes we haven't seen backwardness in months, that would certainly satisfy the "buy and hold" tricky ETFs crowd. The last 4 months has seen the most violent/steepest destruction in volatility since VIX's inception in 1990.


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## Causalien (Apr 4, 2009)

rusty23 said:


> "These funds are continuously rolling their positions in volatility futures. Short-term funds seek a maturity of only one month. Funds that track the VIX Mid-Term Index, such as the ProShares VIX Mid-Term Futures ETF, have an average maturity of five months. In either case, the constant buying and selling eats away at the investment because, in most cases, the new contract is more expensive than the last.
> The iPath S&P 500 VIX Short-Term Futures ETN rolls one-30th of its approximately $1-billion portfolio every day. Over the past three years this has led to an annualized loss of the underlying asset of more than 50 per cent, Mr. Strauts said."


The Mutual Fund (MF) flow data has been touted so many times in Mainstream Media that I am beginning to see it as another pump. Certainly, the hosts and analysts who spill this has been in the business long enough to know that the MF crowd is the herd that gets their fur harvested. If anything, it is only a warning sign when the funds are flowing back in massively. However, I do recall in past histories when the retails don't participate for a long time, the usual market players will have to resort to cannibalism. MF Global is the first example of such, once the cannibalism turns into an avalanche, then we can worry. Right now, things seems to stop at 1 casualty per country.


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## Lephturn (Aug 31, 2009)

Anybody trading volatility should listen to Volatility Views podcast here: http://www.theoptionsinsider.com/

I also suggest you look at the VolX site - specifically the volatility cones: http://volx.us/volatilityconesgraphs4.shtml


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## ddkay (Nov 20, 2010)

Hahaha. Look at TVIX today. Credit Suisse halted share creation weeks ago. Once the arbitrage opportunities between NAV and price was lost, it started moving on its own. It was already broken, but today it's completely broken. Today spot VIX is up 9.32%, and TVIX is down 30%!

I think the bullshit ETF bubble just burst (people lost confidence)...

Don't touch ETFs that halt share creation indefinitely, and if you get stuck with one u must leave, it won't track properly..


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## ddkay (Nov 20, 2010)

http://www.schaeffersresearch.com/c...idethebox_blog.aspx?single=true&blogid=110136

This is a post from a few weeks ago. I completely agree with the conclusion.. these silly ETFs will deviate from the underlying and offer very little protection against market risk in the long run.



> ETFs and ETNs do not have a somewhat fixed quantity of shares outstanding, like a normal stock. Buyers can create new shares by simply buying them on the open market (and, in some ETFs, redeeming them to the issuer in exchange for a basket of the underlying holdings). These created shares don't appear out of the ether, however. The backer (Credit Suisse, in the case of TVIX) effectively takes the other side of the trade, and must either hedge in some fashion or carry open-ended risk. There are regulatory limits that the backer must adhere to, and -- as we just found out -- internal limits that the firm holds itself to. TVIX apparently hit the latter, the internal limits of Credit Suisse, hence the freeze on creating new shares.
> 
> Volume absolutely surged over the past two weeks, which clearly had the effect of pushing Credit Suisse over their limits. And it rippled all across the volatility complex, causing unusual strength and volume in VXX (as we noted last week) and CBOE Market Volatility Index (VIX) futures. [..]
> 
> ...


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## gibor365 (Apr 1, 2011)

TVIX (and other similar stuff of Credit Suisse) it's a legal Ponzi scheme.


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## andrewf (Mar 1, 2010)

A better lesson is don't pay huge premiums to NAV for ETNs/ETFs. Everyone who bought TVIX at a 20% premium to NAV deserved to get burned.


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## Causalien (Apr 4, 2009)

Brilliant play by the person who cornered TVIX. I always thought that the proper way to do it was to short the etf until the creation units becomes more than its underlying asset. Never thought about doing it the other way. Buying so many, that it forces the issuer to create too much units. Only a rich ******* can do/think like this.


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## andrewf (Mar 1, 2010)

I doubt it was one person who drove up the premium. It may have been a short squeeze.

Whoever was long TVIX got burned, though.


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## rusty23 (Jan 25, 2012)

ddkay said:


> http://www.schaeffersresearch.com/c...idethebox_blog.aspx?single=true&blogid=110136
> 
> This is a post from a few weeks ago. I completely agree with the conclusion.. these silly ETFs will deviate from the underlying and offer very little protection against market risk in the long run.


good read


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## andrewf (Mar 1, 2010)

I didn't read that piece earlier. The guy doesn't understand VIX futures. He assumes that steep contango is unusual, when VIX futures are usually in contango, and has been approximately as steep several times in the past. His assumption (based on the posterior extraction method) was that there should only be a two or three percent premium between spot and the front month futures contract, and that before TVIX , large premiums did not exist. His assumption is not just wrong, it is very wrong, and belies his lack of understanding.

Read VIX and More blog by Bill Luby. He's been writing about VIX for five years, and actually understands how these products work.


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## andrewf (Mar 1, 2010)

Argonaut said:


> I wanted to sell some calls in VXX back in the fall but never got around to it. Silly.
> 
> For those with some margin to burn, it's a good idea. Worst case Ontario, you're short VXX which isn't a bad thing in the long run.


I'm leery about selling calls. I'd rather buy puts and limit my losses. I went with long dated options because even if VXX moves against me, I can exit the option with substantial premium, especially since VXX options IV increases during volatility events.


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## andrewf (Mar 1, 2010)

So much for the VIX spike.

I took some profits today, trading 2 puts at 30 strike (15.10) for 3 puts at 20 strike (6.75) all for Jan 2013, taking net 1,000 cash of the table from the initial cost of 1760 (8.80). Not bad for a month and a half (better than aapl, but shhh). I keep VIX product trading to a small part of my portfolio, the rest of which is boring old index ETFs.


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## Causalien (Apr 4, 2009)

I usually don't touch ETF and ETN, but buying put in VXX is sounding like a good idea in theory. I am going to model how well volatility premiums track the volatility in the synthetic volatility index that tracks the actual index which tracks option volatilities.


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## Argonaut (Dec 7, 2010)

andrewf said:


> I'm leery about selling calls. I'd rather buy puts and limit my losses. I went with long dated options because even if VXX moves against me, I can exit the option with substantial premium, especially since VXX options IV increases during volatility events.


Back when I was looking at it, VXX was $45+ and the options had huge premiums so it was costly to buy puts.. selling the volatility was more attractive with a spread to limit potential losses. Obviously buying puts would have worked out even better, but who was to know at the time. Right now I wouldn't make a trade either way because I think we are due for the clockwork sell in April/May, etc.


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## andrewf (Mar 1, 2010)

Maybe so. But people have been calling for a reversal since January, and anyone who exited early has foregone significant gains. Follow the trend and let the market tell you when it is ready to correct.


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## Causalien (Apr 4, 2009)

There's a great quote from the fictional character Jesse Livermore about this.


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## andrewf (Mar 1, 2010)

VXX meltdown continues, down another 5% today. Ouch.


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## ddkay (Nov 20, 2010)

GAZ is trading at a premium and puts are still underpriced too


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## ddkay (Nov 20, 2010)

Trading at a 40% premium to quantify that, so potentially 40% more downside


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## webber22 (Mar 6, 2011)

There's a rumour that Horizon plans to bring out a new etf HVD - the VIX bear - to complement the HVU vix bull. Right now the HVU is looking rather tempting at $3.69


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## ddkay (Nov 20, 2010)

webber22 said:


> Right now the HVU is looking rather tempting at $3.69


Someone said that at $20 too lol


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## rusty23 (Jan 25, 2012)

ya when i started this thread it was just above $5


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