Volatility ETP Price Projection Service

I am offering a Volatility ETP Projection Service that calculates future volatility Exchange Traded Product (ETP) prices assuming the current VIX futures term structure is stable.

In my post Using the VIX Futures Term Structure to Predict Volatility ETP Prices, I show how this approach can be used to produce statistically valid ETP price projections and ranges.

This forecast does not attempt to predict upcoming volatility spikes or slumps—it’s totally focused on the price trends that would occur with a static VIX futures term structure.

With a stable term structure (and a stable spot VIX), the VIX futures prices that underlie the volatility ETPs like VXX, VXXB, UVXY, and SVXY do change but they precisely follow the price/days-til-expiration curve.  The VIX Central chart below shows the closing VIX futures prices for August 23, 2018.  If the term structure is stable then the curve at the end of the 24th would have the identical price vs time shape but the blue data points, representing futures values, would all be shifted slightly down and to the left.

The VIX futures that underlie the volatility ETP are volatile creatures—tomorrow’s values can be dramatically different than today.  I’m not trying to predict those sorts of changes.  What I am computing is the decay or boost that the volatility ETPs experience if the term structure stays in a stable contango or backwardation configuration.  This calculation is not an easy problem—there are a lot of moving parts even when the market is stable.

Historically the VIX futures term structure has been in a contango configuration 80%+ of the time.  Contango fuels a situation where the long volatility ETPs like VXX, UVXY, or TVIX suffer from high decay factors.  Anyone that’s looked at their long-term charts will see the massive impact of those decays over the long run.

Because of the typical decay in long volatility products, short volatility trades are popular but the possibility of volatility spikes makes risk management an important concern.  By estimating median prices and +-1 sigma ranges traders have some analytical results that can help quantify payoffs and establish appropriate risk management thresholds.

The chart below shows a typical SVXY projection when the term structure has been in contango for a while.

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How Does VelocityShares’ ZIV Work?

Update Effective July 2, 2020 ZIV stopped trading on national exchanges (press release). The issuer, Credit Suisse (CS) halted share creations effective July 3rd but is not terminating the fund. They reserve the right to do so but don’t have to until 2030. ZIV is currently trading on OTC exchanges, e.g., OTCMarkets.com and is currently trading pretty close to its IV price, the theoretic value …

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1.5X UVXY & -0.5X SVXY Open/High/Low/Close values starting March 2004

Some volatility trading systems use intra-day open, high, low (OHL) prices as part of their algorithms for determining when to trade. UVXY and SVXY didn’t start trading until late 2011—just after the 2011 correction and well past the 2008/2009 bear market so there’s no actual trade data from those important downturns. To fill that deficiency I did some simulations a few years ago using the …

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A Better Way to Model the VIX

Models are useful. They help us understand the world around us and aid us in predicting what will happen next. But it’s important to remember that models don’t necessarily reflect the underlying reality of the thing we’re modeling. The Ptolemaic model of the solar system assumed the Earth was the center of everything but in spite of that spectacular error, it did a good job of …

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How Much Should We Expect the VIX to Move?

Every couple of months it seems like there’s an uptick in articles about the CBOE’s VIX Index being broken or manipulated.   Generally I expect the percentage moves in the VIX to be around a factor of 4 in the opposite direction of SPX (S&P 500).  But there are significant eccentricities in the VIX that I factor in, for example Fridays tend to be down days, …

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