The Lion & The Lamb

Hey Traders,

With February rolling off Wednesday morning, March is now the front month future …

And it is trading at an out-of-world premium to the cash.  

The VIX closed 21.5 Wednesday. Check out the VIX curve:

There is an INSANELY wide premium between the March future and VIX.

A two-point spread is about normal. Three would be considered inflated …

This spread is over 4.25!

That’s March coming in like a lion — very blustery, indeed!

Think about it … we  could see the VIX move UP and the future still lose money over the next few days.

With the way the market sell-off fizzled on Wednesday, there appears to be a pretty decent bid for the S&P 500 at 3900.

When sell-offs that seem to have legs turn around completely, we know there is an underlying bid.

With that in mind, it’s going to be pretty hard for VIX to explode higher.

I expect to see a 1-2 point drop in the March future (and potentially the whole curve with it) over the next couple of days.

This spells doom for the VIX Short-Term Futures ETN (VXX) and ProShares Ultra VIX Short- Term Futures ETF (UVXY).

UVXY is already below 10 and we could see another reverse split coming in that name. 

A higher price gives us a bigger drop when contango decay (which is calculated using a percent of the ETF’s price) is happening.

VXX has a daily decay of about .15 a day. This means that in a month it could be $4.50 lower.

Remember VXX attempts to replicate the return of a 30 day future. It does this by owning a basket of VIX futures.

When the VIX looks like it does above, the fact that on most days the futures are falling TOWARD the cash index causes VXX to decay.

UVXY is the same, only 1.5X VXX plus all the problems that come with leveraged ETFs.

The Option Pit Trade

We built a trade in our Trading Legion mentoring program that takes advantage of this potential VXX/UVXY drop and is still hedged.

Even with the cost of paying for the hedge, we see huge edge in our long puts.

I think we will see VXX sub-15 by the end of the week, maybe even 14.5.

By the end of the month it will be in the 13s.

That’s positively lamb-like!

The VIX Light Is Red, and Volatility Sales Are Favorable.

Your Only Option


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