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Saturday, August 4, 2012

Trading Volatility S&P500 Index VIX

Last week, there was big disconnect between S&P500 and Volatility S&P500 Index. For the week, S&P500 was up 5.02 point or 0.36% but Volatility Index S&P500 VIX was down from  17.43 to 15.64 or  -9.36%.  So, Why this disconnect ? and Where is VIX heading and how low will it go ? This are the few question every trader has in their mind.
volatility index vix
Volatility Index vix was down 9.36% while S&P500 was up 5 point or 0.36% for the week
Why there was disconnect between S&P500 and VIX ?
Buy the rumor sell the news
Buy the rumor, and sell the news
The answer is "Buy the rumor and sell the news" and "Go opposite of what majority think". Last week, VIX kept rising because there was uncertainty whether FED, ECB or BOE will do something or not. FED, ECB and BOE didn't provide any stimulus to the market but the news was out and many took long position in VIX in anticipation of fear rising but the rumor of ECB doing something kept coming late Thursday afternoon, which led to sell off in VIX. As the short position increased in S&P500, because of no action from central banker, market was set for rebound. But the price action in VIX is over done and it should rebounce as the biggest event of this year is coming on September 12th, when the German Court will rule out on bailout fund and fiscal pact.

How Low Can Volatility Index (VIX) go ? 
In stock market what goes up will come down and vice versa. VIX has hit 10.42 in Nov, 2006 and 10.66 in Jan 1994. So there is possibility that it can go as low as 10.42 At the same time everytime VIX has hit low, it has bounce back and doubled in no time.
In stock market, what goes up comes down and vice versa. VIX is a buy at current level.
vix 4 year chart
Zooming into 4 year VIX chart, its close to all time low.
How to trade VIX ?
There are many ways to trade VIX and it depends on how much risk one is willing to take. As long as VIX is in contango, it's likely to sell off on Rally and that's what happening with VIX in last 8 month. Once, VIX is back into backwardation, it will rally very sharply. Most of the time VIX is in contango. One can trade different VIX ETF, or you can use broker of your choice or use Option House to buy VIX itself.

For long VIX: I really don't like Credit Suisse (TVIX) depending on the risk, VXX is better choice.
SymbolNamePriceChangeAssets *Avg. VolYTD
UVXYltra VIX Short-Term Futures ETF$6.02-13.26%$243,41616,516,699-91.75%
TVIXVelocityShares Daily 2x VIX Short-Term ETN$3.01-10.15%$207,79013,357,175-90.58%
CVOLC-Tracks ETN Citi Volatility Index Total Return$7.26-9.36%$3,63037,456-74.45%
VIXYProShares VIX Short-Term Futures ETF$25.87-6.84%$138,338896,859-65.84%
VXXiPath S&P 500 VIX Short Term Futures ETN$12.16-6.68%$1,473,03450,255,094-65.78%
VIIXVelocityShares VIX Short-Term ETN$26.24-6.92%$26,562479,380-65.78%
VXAAETRACS 1-Month S&P 500 VIX Futures ETN due Septermber 6, 2041$32.72+2.47%$3,272517-61.92%
TVIZVelocityShares Daily 2x VIX Medium-Term ETN$26.01-8.64%$4,8133,647-56.76%

For Short VIX:
SymbolNamePriceChangeAssets *Avg. VolYTD
XIVVelocityShares Daily Inverse VIX Short-Term ETN$13.41+7.11%$246,89513,404,922+105.99%
SVXYShort VIX Short-Term Futures ETF$106.46+6.99%$20,064346,752+103.63%
AAVXETRACS 4-Month S&P 500 VIX Futures ETN due SEptermber 6, 2041$158.77+0.63%$15,8771,615+83.21%
BBVXETRACS DAily Short 2-Month S&P 500 VIX Futures ETN due September 6, 2041$149.52-0.39%$14,9521,629+55.73%
IVOPInverse S&P 500 VIX Short-Term Futures ETN (II) Profile$32.55unch$3,2554,626+43.14%
DDVXETRACS Daily Short 4-Months S&P 500 VIX Futures ETN due September 6,2041$132.05-1.92%$13,205744+37.31%
CCVXETRACS Daily Short 3-Month S&P 500 VIX Futures ETN due September 6, 2041$129.55-1.72%$12,9551,526+36.41%
ZIVVelocityShares Daily Inverse VIX Medium-Term ETN$16.79+2.19%$8,9168,221+34.75%