VIX-UAL Evidence

Hey Traders,

When the VIX complex is in contango (futures prices are higher than spot prices), holding VXX is a loser. 


This is the current VIX curve:

It is in a HUGE contango, with March trading 3.25 points above the VIX index.

What’s more, April futures are a monster 6.15 premium to the VIX index.

(A quick note for your visual learners: The above chart is a classic example of an especially large contango. … A contango unchained, if you will.)

Last Thursday, Feb. 11, the VIX index closed 21.25. Yesterday, it closed 22.49.

So VIX is up on the week …

Let’s take a look at the VIX over the VXX. How did the VXX fair in a rising environment:

What do we see above?

VIX is up … and in the last five days VXX has dropped over 1.00!

Money Moves

If you want to buy VXX because you think the VIX is going to go up, that’s fine.

BUT … wait for the VIX to start moving higher, instead of buying calls a week or two out in anticipation.

It is entirely possible that you can be right and the VIX runs higher — and you still lose money on your VXX puts. (The charts above illustrate such a scenario.)

Now, when we have a crazy contango (contango unchained!), as we do now, VXX puts are going to pay.

At noon on Wednesday, we bought VXX puts and hedged them with a small amount of call spreads …

The trade was up nicely by close — and continued to climb on Thursday.

That’s why we’ll be putting on ANOTHER contango trade at noon tomorrow in our Volatility Edge trading service

Now here’s a little something different, just because it takes two to, ahem, contango …

I will give you this trade for free!

All you have to do is pick up the phone starting at 12:30 p.m. today (Friday, Feb. 19) and call Option Pit Head of Customer Care Teddy Trapuzzano who will give you all the details — for free!

The Option Pit VIX Light Is Red, and we like short volatility plays.

Your Only Option,

Mark Sebastian

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