Going Long In These Will End In Tears

The Option Pit VIX Light Is Red, And Volatility Will Drop.


Hey Traders,


I was glad to see so many of you at the Option Pit special event yesterday …


I hope you learned a lot about how the upcoming banking regulations that go into effect on June 28 (this Monday!) could have a huge effect on commodities … and volatility … over the next few months.


If you missed it, we’ll be sending a replay out later, or you can read a little bit about it here.


Now, speaking of volatility predictions …


I often talk about how iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) and ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) are occasional strategic longs, and near constant shorts.


But time and time again I see people still going long on these names!


That is almost never a good idea …


The last few weeks I have been CRUSHING it being short both VXX and UVXY.


Here is why …


I don’t know how many times I have to say this …


Except under RARE circumstances it is never a good idea to hold long VXX or UVXY overnight …


I’ll explain the reason in a second …


But first, I want to show you a chart of VXX over VIX.



The VIX failed to close below its lows from June 11th (although it got close).


But take a look at VXX.


On June 11th, the VXX closed just below 31 at 30.82 …


Today, with the VIX higher than it was on June 11th, the VXX closed below 30 at 29.70.


That’s right, with the VIX failing to close below its recent lows, VXX is off more than a dollar (UVXY is even worse!).


Why does this happen?


VIX futures.


VIX futures, when in a contango (futures prices trading higher than spot price), trade at a premium to the VIX cash …


Every day that goes by the VIX futures slowly converge toward the VIX …


When the VIX is trading at a discount to the futures, the futures can lose a lot of money,  even if the VIX goes up.


Here is the VIX curve from today (pink), overlaid against the curve from June 11th (green)…



The curve has generally stayed almost the exact same shape …


But the futures have moved, even as the current curve is slightly flatter.


So what has happened … look at the last pink arrow … that is July…


On June 11th it was at 18.85 …


Today, it closed at 18.10 …


So even though the VIX is higher than it was on June 11th, the futures are lower …


Thus, VXX loses money.


Remember this … VXX and UVXY are great to short if you know what you are doing (ahem … Volatility Edge …)


They can be good for a long play in rare circumstances


But if you try to buy and hold VXX or UVXY … it will end in tears …


Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.