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The US markets and how to play the VIX

April 22, 2016

There was a discussion on the VIX and different ways to play volatility earlier this week. We brought Doc on to outline how he plays volatility and his outlook into the next couple weeks. We also quickly touch on the dollar. Tune into the weekend show to hear Doc’s outlook on the precious metals and other commodities.

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Discussion
20 Comments
    Apr 22, 2016 22:00 AM

    The market should go up to the end of the month at least and I think when oil finally reaches a major top near 48 to 49.50, the whole market should start a correction in May.

      Apr 22, 2016 22:05 AM

      Paul, I couldn’t agree more.

        Apr 22, 2016 22:27 AM

        Doc – just a quick note that UVXY and TVIX are double-leveraged VIX-related instruments. Although, lately, neither one has been tracking at 2 x the VIX and they have really been off-kilter with the VIX due to how the futures contracts are settled inside these ETFs.

          Apr 22, 2016 22:33 AM

          Doc – I think you may like the article I posted below asking if the VIX proxies are a crowded trade, with record amounts of inflows into them this year. Apparently many investors are stashing money in these instruments to guard against a crash, but this has started to concern me as I feel better when going against the herd.

          Here’s a short passage from the article below:

          “The double leveraged long short term VIX products have added almost $1.3 billion ytd in spite of being down 43% (the numbers since February 16th are more staggering with UVXY getting $1.4 billion and TVIX getting $0.55 billion – a whopping $1.95 billion in total).”

          “I don’t know what this does for the market, but the rapid growth to never before seen sizes in a complex and highly leveraged space is something every investor in the market should be looking at and trying to understand because I think the size of these VIX based products has grown to the point that they cannot be easily dismissed or ignored….”

            Apr 22, 2016 22:39 AM

            In 2015 and 2016 I’ve had 2 really profitable trades in UVXY and 2 smaller profitable trades in TVIX. One concern in the back of my mind though, is that when I made those trades last year and earlier this year the VIX was not a topic of the day, and the trades weren’t as crowded, so when the VIX spiked these vehicles actually out-performed with little overhead resistance. Now with Billions of dollars pouring into the VIX ETFs and ETNs this may cap the growth in these on a spike when investors that are severely underwater sell out of positions that get back in the money.

            Do you have any thoughts on what may happen when the VIX does move up in May but with all these traders selling out of winning positions once there are some green shoots in VIXY, UVXY, and TVIX?

      Apr 22, 2016 22:11 AM

      That’s very similar to how I’m looking at things as well Paul L. We’ll see if once the month of April rolls over if we get the seasonal sell in May and go away pattern.

          Apr 22, 2016 22:59 AM

          1 year composite chart of the VIX index and the 3 long proxies: (VIXY), (UVXY), (TVIX) :

          You can see how UVXY and TVIX outpeform VIXY on the upside rallies and downside selloffs.

          http://stockcharts.com/freecharts/perf.php?$VIX,VIXY,UVXY,TVIX&p=5&O=011000

            Apr 22, 2016 22:55 PM

            I don’t think a week is too long to hold TVIX Shad. Not if you feel comfortable that you are going to be on the right side of the trade. And it won’t get eaten up by decay in such a short period of time either as I have discovered. I have been in for a week already at a slightly higher cost basis than you but am not really bothered at all that its down 30 cents or whatever.

            As Paul L and Doc mention above it looks probable that we get some kind of correction in May and that WTI will top out then. I agree with both of them on that score so that’s why I carry the protection.

            If it does not pan out that’s ok too. We buy it to offset potential losses on our other holdings so it acts like an insurance policy for that “just in case” bad day in May. I am basically treating it as a cost of doing business.

            The downside is minimal but the upside stands to be very healthy.

            Apr 22, 2016 22:20 PM

            That’s a good outlook to have Bridman and I’m in agreement that May will likely present some weakness in Oil and the general stock markets. Originally I thought the markets may have topped out last week or earlier this week, but now am prepared that they could still rise going into late April/early May. In another week or two things should turn and put my position back in the money. However, Doc C wrote that he could see downward pressure in the VIX into June before the FOMC, so if that was the case, I’d see and buy back lower.

            Apr 22, 2016 22:28 PM

            Not Doc C …..Don C….. Don Corleone.

            Also that should have said if the rally was going to continue into June that:
            “I’d sell (not see) and buy back lower”

            Apr 22, 2016 22:59 PM

            I would do the same except I hate to buy and sell in and out when I feel I am correct on the idea. We cannot know for sure of course. Its just probabilities. If TVIX drops to a dollar and change I will have to eat some crow I guess.

            But that’s life and I won’t let such setback bother me too much.

            I kind of have a different perspective than most here anyway. You know I have often mentioned how poor it is over here where I live. I am surrounded by neighbors earning 30 to 90 dollars a month (and some actually get less).

            If I make a thousand or two on a trade it amounts to an annual income for these people. When I make more it can be as much as a decade of their salary before tax. How ridiculous is that?

            And if I lose 500 bucks on TVIX the whole thought process repeats in reverse. We have to keep our perspective at all times. Those of us who can trade with success are truly blessed and we need to respect that advantage others might never have.

            So don’t sweat about it too much. Other people only wish they had such problems!

            Apr 22, 2016 22:41 PM

            I would have several tens of thousands in losses if TVIX went down to $1.50, so it’s a big enough position that I’m giving some thought to selling and buying back lower if the rise in the conventional markets starts looking to strong. My hunch is that the markets may make a move at higher highs next week and then top out heading into May, so I’m willing to wait a while longer to see how things develop and if we get some of the seasonal weakness in May.

            Again, volatility is not my primary focus or anything, but having a long volatility position in place during turbulent times is bit like having a little insurance position in case the markets fall out of bed in a bigger correction suddenly; or if a black swan surfaces; or if monetary policy pushing emerging markets too far; or if the Fed botches it once again, etc… etc….

            Right now the extremely low volatility shows just how complacent this marketplace has become, and generally that is when I enter a volatility position. There’s so much going on right now that I don’t mind having a position in place, but I may trim the position down some when the markets do finally pull back in a week or two as I have some other areas I’d like to deploy this capital, and the immediate risks just don’t seem very threatening to the general investing universe. Even a crappy earnings season isn’t really phasing the markets, and Oil is off in lala land but has continued to march higher despite all the reasons it should really be treading water to drifting lower. The dollar is starting to strengthen though, and if this eventually keeps Oil in check or pressures it and commodities, then this may exert some force on the markets to the downside in tandem in a sell everything environment.

            We’ll see how things go over the next few weeks but for now I’m in a neutral hold mode.

    Apr 22, 2016 22:48 AM

    Saudi Arabia US Friction, Economic Update, China Gold Fix and Fraud Ignored by MSM

    Join Greg Hunter as he analyzes these stories and more in the Weekly News Wrap-Up.

    At the 19:30 mark Greg discloses Jim Sinclair is preparing a suit against the banks for the benefit of TRX shareholders.

    http://usawatchdog.com/weekly-news-wrap-up-4-22-16-greg-hunter/

    Apr 22, 2016 22:11 PM

    The grains got walloped today. I mean it was a total body slam. Beans, corn, oats, rice and wheat were blown right out of the water. I had mentioned this morning that they were all posting reversal candles but did not expect this massive sell off so fast.

    If metals behave the same way come Monday then it is going to be bloody as hell for silver and gold. Just remember everyone….when you see the Yen drop like a rock (like today) then its time to get out of Dodge.

      Apr 22, 2016 22:13 PM

      Options expiration in grains today, to many calls in the money.

        Apr 22, 2016 22:22 PM

        I’d say the strengthening US Dollar had a contributing factor as well:

        ^ USD 95.12 +0.54

          Apr 22, 2016 22:24 PM

          agreed

            Apr 22, 2016 22:36 PM

            I looked back on the charts that Matthew posted a few days ago on corn & beans and I don’t see anything there that has me worried. Soybeans poked down through the top of the fork but then closed above it, would not surprise me if they are higher next week.

        Apr 22, 2016 22:01 PM

        Thanks Lewis. I was so absorbed I completely forgot.