Comments on: A Hat Trick for Inverse / Leveraged Volatility Funds

By: vance3h

vance3h — Sun, 11 Nov 2012 22:43:00 +0000

Thanks Ted!

– Vance

By: Ted Barnhart

Ted Barnhart — Fri, 09 Nov 2012 17:06:00 +0000

I just discovered your blog while trying to find an article I read last year about a SVXY/VIXM “spread trade.”

You have a great site, l look forward to following.

By: vance3h

vance3h — Fri, 09 Nov 2012 01:48:00 +0000

Hi WFI,
My strategy, then and now is to stay out of inverse volatility when the VIX/VXV ratio is above .917 (see http://sixfigureinvesting.com/2012/09/taming-inverse-volatility-with-a-simple-ratio/ ). The ratio is about .94 right now, and it is not surprising that the term structure has flattened. If the market really panics the front months will rise dramatically. The mid term structure has been steep in quiet times, essentially since the 2008/2009 crash. My gut is that it is not going to go back to 2004 to 2007 behaviors. Overall market volatility will still cause big shifts in the term structure, but I think the mid term will revert to steep during quiet times. My pet theory is that the rise of VIX futures volume in the mid months has driven this, but I don’t have a cause / effect relationship that says why.

– Vance

By: WFI

WFI — Thu, 08 Nov 2012 23:33:00 +0000

The vix mid term contango is about half what it was a month ago, how would that change your strategy?

Also do you have any suggestion why the mid term structure had
such a wild ride, up sharp and down sharp?

By: vance3h

vance3h — Wed, 31 Oct 2012 15:11:00 +0000

I don’t know where your square term on the multiplier comes from (2.37^2). Daily rebalanced 2X leverage funds only target twice the daily percentage change on the underlying. . The reasonable / simplistic extension would be twice the percentage gain over a longer time frame, not twice (or square of) the multiplier. Of course, even this bar is rarely met due to path dependencies/compounding. This post points out an exception to that norm.

By: Guest

Guest — Wed, 31 Oct 2012 14:35:00 +0000

Leveraged and inverse funds should always underperform the corresponding multiple of the underlying index in log returns. So if VXX went up 137%, i.e. 2.37x, we would have expected TVIX to have gone up 2.37^2 or 5.62x or 462% if it had no underperformance. Since TVIX actually went up only 348%, that’s an underperformance of 114%.