Confidence runs high; I’m Vix’ed out

Maybe I’m a one-trick pony.  I just happen to like playing the Vix – in particular, the Vix-related derivatives.  There are 2 main ways I like to do this:

  1. Just short it: I take advantage of a few related characteristics to short the Vix via UVXY.  In particular, I like that UVXY is the prototype of a bad long-term buy, so I short the product using medium-dated options.  After biting my nails during the past couple months’ market volatility, this trade finally hit pay dirt.  I’m out of my latest iteration as of today, after holding about 2.5 months.
  2. Spread it: when the markets get really scared, the Vix futures curve looks like the red line below (from previous post):
    Mmm...backwardation.  Source: thinkorswim by TDAmeritrade

    Mmm…backwardation. Source: thinkorswim by TDAmeritrade

    Today that red curve looks much more normal, as we’re back to daily all-time highs:

    All back to normal.  Source: thinkorswim by TDAmeritrade.

    All back to normal. Source: thinkorswim by TDAmeritrade.

    I took off the latest iteration of this trade yesterday.  About 3 weeks of holding time.

What have I learned?  First, it’s great to learn with successful trades.  My theses were researched and executed when the time was right.  Most importantly – in my mind – is patience: at one point I was looking at some pretty solid losses on the #1 trade as the Vix kept climbing higher.  Nevertheless, that’s why I chose medium-term options to express the trade, and ensured I had a manageable maximum loss at initiation of the trade.

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