Monday, March 18, 2013

XIV an easy play?

Scalped some XIV $22.37 to $22.62 in 25 minutes.  Going to try some new plays with just volatility movements.   We have been experiencing very low volatility.  This is typical in bull markets. Volatility is measured with the VIX index.  While you can't buy or sell the VIX,  there are other  ETNs and ETFs that attempt to replicate the changes in the VIX.  

As the VIX is decreasing you can go long the $XIV.  The XIV goes up as volatility goes down.  VXX  goes up, as volatility goes up, at exponential rates.  XIV is probably a good long term play, since as the markets climb higher the XIV will move higher. The XIV can move 10X faster then the overall markets, but in reverse.  So a .5% move in the SPY lower means a 5% move lower in the XIV.

VXX should only be played as the markets hit a high point.  The VXX is said to be in constant contango,  which means that it converges to its mean.  It can be jumpy, but is constantly heading lower.  VXX has many reverse splits, so be careful.  The market only needs to move down .5% and the VXX will move up 5%!

Just trade in and out, but know that the VXX will go lower in time.  Only buy the VXX before the market is crashing, since it will always move back down. UVXY is also similar to VXX but is a 2X ETF.  So when the VXX is up 5%, the UVXM will be up 10%.  Keep in mind that the SPY just needs to move down .5% for these to move up huge!

Check out Term Structure.  When in Contago buy XIV, when in backwardation buy VXX or UVXY.
http://www.tradingvolatility.net/p/datasourceurldocs.html
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