During the last few months, we have demonstrated that volatility has predictive properties, and that there exist outstanding tools to capitalize on these tendencies. Today may present another such opportunity.
In our August article, “Fall Volatility Ahead, The Futures, Options and ETPs Are Already Expensive”, it was our belief that multiple events were causing a temporary elevation in the VIX and high premiums in volatility products in anticipation of market events. Subsequently, September did not offer a market sell-off and the Fed implemented a quantitative easing plan that far exceeded market expectations. The VIX tumbled from 18.96 to 13.51 in 8 trading days. VXX puts purchased around this date paid off exceptionally well.
At that point we suggested that volatility was historically low versus its September average and thus presented another opportunity to get long volatility at excellent prices in a September article, “Now That Fear Has Subsided, How to Play Volatility Using VIX Options and ETPs”. In just four trading days, the VIX was back over 17, and the options we suggested rose 50%. Furthermore, the VXX butterfly trade was closed for a 100% profit.
Our proprietary research is suggesting that the VIX may be elevated relative to historic volatility looking forward in the options expiration cycle. Uncertainty preceding another event, the presidential election, could be causing an elevated volatility structure.
VIX Futures Term Structure:
| VX X2-CF | S&P 500 VOLATILITY | November2012 | 16:57:16 | 17.80 | 0.90 | 16.95 | 17.85 | 16.65 |
| VX Z2-CF | S&P 500 VOLATILITY | December2012 | 16:57:17 | 18.60 | 0.67 | 17.90 | 18.65 | 17.55 |
| VX F3-CF | S&P 500 VOLATILITY | January2013 | 16:57:17 | 20.00 | 0.78 | 19.10 | 20.10 | 18.90 |
| VX G3-CF | S&P 500 VOLATILITY | February2013 | 16:57:17 | 20.70 | 0.68 | 19.95 | 20.85 | 19.68 |
| VX H3-CF | S&P 500 VOLATILITY | March2013 | 16:57:17 | 21.50 | 0.59 | 20.85 | 21.70 | 20.45 |
| VX J3-CF | S&P 500 VOLATILITY | April2013 | 16:57:17 | 22.45 | 0.58 | 21.75 | 22.60 | 21.50 |
| VX K3-CF | S&P 500 VOLATILITY | May2013 | 16:57:17 | 23.15 | 0.63 | 22.43 | 23.30 | 22.20 |
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 16:14:34 | 23.65 | 0.75 | 22.94 | 23.80 | 22.70 |
| VX N3-CF | S&P 500 VOLATILITY | July2013 | 16:13:13 | 24.20 | 0.70 | 23.30 | 24.25 | 23.26 |
VXX, the VIX short-term futures ETN, is holding nearly 50% of each November and December futures. The negative roll is currently 4.5%.
VXX December Put Option Chain:
| 28.00 | 0.55 | -0.07 | 0.45 | 0.50 | 343 | 3704 |
| 29.00 | 0.82 | -0.08 | 0.67 | 0.74 | 228 | 3127 |
| 30.00 | 1.01 | -0.28 | 1.00 | 1.02 | 779 | 8983 |
| 31.00 | 1.36 | -0.36 | 1.29 | 1.42 | 213 | 5788 |
| 32.00 | 1.88 | -0.35 | 1.73 | 1.82 | 6330 | 1145 |
| 33.00 | 2.52 | -0.14 | 2.20 | 2.35 | 729 | 966 |
| 34.00 | 2.90 | -0.45 | 2.71 | 2.89 | 798 | 1846 |
| 35.00 | 3.35 | -0.65 | 3.30 | 3.40 | 324 | 4203 |
| 36.00 | 4.43 | -0.22 | 3.90 | 4.00 | 36 | 464 |
Our proprietary volatility wave indicators are implying another VIX fall dictated by history and time of cycle. The December $30 puts present good value and time horizon for a short VIX futures trade. A riskier but potentially more lucrative trade can be entered using November puts at the $32 strike for about .47, with a potential return of 3x. Yet, the Decembers have far more going for them over time historically and seasonally as December has volatility anomalies associated with that monthly cycle.
Obviously, this trade can be derailed by any number of events, including a market breakdown below the 200 day moving average, political event in Europe, natural disaster, etc. There are many risk factors, yet as opposed to being short VXX or long XIV, this trade offers terrific leverage with defined risk.
Twitter/Stocktwits followers will receive notification when this trade is closed, and any subsequent new trading opportunities. @VolatilityWiz on Stocktwits and Twitter.
Filed under: Uncategorized, analytics, futures, options, trade, vix, volatility, vxx
The Stock Sleuth 