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Chuck Norris Goes Long Volatility
Hell, I don't know if you've been paying attention to our market posts this week or not, and if you haven't I don't blame you.
After all, it's hard to make yourself wade into finance commentary when it's so much easier to click on the Trump coverage and rubber neck it as you drive by the smoldering wreckage of this administration.
But on the off chance you've been reading the VIX ETP stuff, you might recall that we've mentioned the big inflows into short VIX products and the big outflows from
Yeah, fully agree with all of that. After cashing out (too early today and hate myself for it) I am contemplating the next move. I was of the opinion to just go long UVXY over medium term, but after crunching the numbers, I’m now convinced while long vol is the only move to make, holding UVXY for anything other than short term day/swing trading is a foolish endeavor.
UVXY can only increase if VIX continues to increase. Even if vol trends higher, coming off it’s lows over the medium term, UVXY will still end up losing money, as a flat VIX = down UVXY. On the plus side, though, the feedback loop and daily rebalancing dynamics make these ideal for creating trends to day/swing trade (if you have a little luck on your side)
Only thing that makes sense over medium term are VIX futures, and stay the fuck away from VIX ETPs. Regardless, I can’t shake a gut feeling this will end very badly. Think about this: the index will cause the derivatives to move, the derivative dynamic will exacerbate the move, at which point the derivatives will start to impact, to some degree, further moves in the underlying. This is another feedback loop that is not always considered at first blush.
In any case, if the derivatives start having a material impact on the flow of the underlying, we will have a serious problem.