Schaeffer's Outside the Box Blog
Stocks quoted in this article:

Well, you wanted a VIX-plosion, now you got it!

The CBOE Market Volatility Index (VIX) closed at 22.82 on Friday, and hit an intraday high of 23.23. We last saw levels this high on June 15, so basically half a year ago. No, 23 is not historically high -- it's not even all that far from the VIX average over forever (of something around 20 or 21). But it is very high relative to itself.

The VIX closed 24% above its 10-day simple moving average and well above its upper (two standard deviation) Bollinger Band on the 10-day.

I use 20% above the 10-day as marker for a "stretched" move. It usually closes there a few times a year, but this is actually the first instance in 2012, so we saved our best panic for the penultimate day of the year. Which actually highlights how extremely placid a market we saw in 2012 ... at least until this past week.

I personally use this as a contra-tell. The VIX mean-reverts over time, so this represents a decent deviation from the mean. By and large, if you go long the market at the close on days with the VIX in this condition -- and then close the position when the VIX crosses back below the 10-day, you tend to win over time.

But alas, this is not without pitfalls -- though frankly, you could say that about any strategy. The VIX kept going last fall and got as much at 70% above the 10-day, so that's a lot of pain before the trade worked better. And of course the fall 2008 was one big extended overbought VIX that took months to work itself out.

Long story short: Fading an overbought VIX via market longs is a winning strategy. But it will have sporadic large misfires, so it's probably best to play via spreads or simply long calls that can only go to zero. And yes, I know buying calls during a volatility explosion sounds counter-intuitive, but there's some data to suggest that buying short duration (fewer than two months) options into a volatility lift actually works as a directional play. "Works" might mean "loses less money," of course, so we're talking on a relative basis here.

Then of course, there's our good friend the iPath S&P 500 VIX Short-Term Futures ETN (VXX). It rallied a pretty impressive 30.7% from the close of Dec. 18 through the after-hours Volatility Explosion on Dec 28. Of course, it's still down 97.6% from its inception in January 2009.

I hope that highlights a couple of points about VXX. One is that you should never buy and hold it. And two is that shorting it is trickier than meets the eye in a product that has just gotten smoked over time. It churns down but occasionally explodes up. I'm using the explosion to scale into some XIV (inverse VXX).

Another interesting volatility ETN here is the UBS E-TRACS Daily Long-Short VIX (XVIX). It goes long one iPath S&P 500 VIX Mid-Term Futures (VXZ) versus shorting two VXX. Remember, the VXZ proxies four-to-seven month VIX futures, whereas VXX proxies 30-day VIX futures. So XVIX is essentially a play on the slope of the VIX futures curve.

Right now, that slope is on the flat side, as only about 0.5 separates June futures from February futures. If you believe that term structure will steepen again, the XVIX is a good way to play it.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.

permanent link

Partner Center

© 2015 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242 Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email:

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.

Market Data provided by | Data delayed 15-20 minutes unless otherwise indicated.