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How Volatility based tickers like UVXY TVIX VXX SVXY and XIV are priced?

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How Volatility based tickers like UVXY TVIX VXX SVXY and XIV are priced?

 

Disclaimer

I will start today’s email by once again stressing that these daily emails are an attempt to educate in the area of Volatility Trading. These are in no way investment advice. We would request you to do your own due diligence when investing and we want you to agree to the fact that when you review such emails sent by us, you are acknowledging and agreeing that these communications are educational in nature.

How Volatility based tickers like UVXY TVIX VXX SVXY and XIV are priced?

As I have repeated many times in these daily emails, the price of the above Volatility tickers depends solely on M1 (current month VIX futures) and M2 (next month VIX futures).

Here are the rules (which are mentioned in my Trading Volatility book on Page 28/29).

• If both M1 and M2 fall as compared to previous day’s M1 and M2, VXX price will fall. This means TVIX and UVXY prices will also fall and SVXY and XIV’s price will rise.

• If both M1 and M2 rise as compared to previous day M1 and M2, VXX price will rise. This means TVIX and UVXY prices will also rise and SVXY and XIV’s price will fall.

• If M1 falls as compared to previous day’s M1 and M2 remains the same as previous day’s M2, then VXX price will fall. This means TVIX and UVXY’s price will also fall and SVXY and XIV’s price will rise.

• If M1 rises as compared to previous day’s M1 and M2 remains the same as previous day’s M2, then VXX price will rise. This means TVIX and UVXY price will also rise and SVXY and XIV price will fall.

• If M1 is the same as previous day’s M1 but M2 falls as compared to previous day’s M2, then VXX price will fall. This means TVIX and UVXY’s price will also fall and SVXY and XIV’s price will rise.

• If M1 is the same as previous day’s M1 but M2 rises as compared to previous day’s M2, then VXX price will rise. This means TVIX and UVXY’s price will also rise and SVXY and XIV’s price will fall.

• If M1 falls as compared to previous day’s M1 and M2 rises as compared to previous day M2, then the VXX price will depend on which day of the cycle we are and the weighted average calculation can let us know what the final price is.

A simple explanation of the price movement of these Volatility tickers over the past few days is both M1 and M2 have continued to rise almost every day, thereby raising UVXY price and falling SVXY price.

When will this Stop?

I get so many messages asking when this UVXY price rise will stop? One needs a crystal ball to answer such a question and I don’t have one.

Does VIX Futures graph as seen on vixcentral.com have an upward slope even now?

Even as I type this message, the VIX futures graph has an upward slope which implies that over long term, UVXY price will fall and SVXY price will rise.

This is because, these Volatility funds that run UVXY, TVIX and VXX will sell a cheaper M1 and buy a more expensive M2, every day, day after day, (as long as the VIX futures graph has an upward slope) there by having a price reduction (because they are making loss transactions).

However, if you go to vixcentral.com now, you will notice that the gap between M1 (=13.8) and M2 (=13.98) is rather small. At the blink of an eye, M1 can creep higher to say 14.25, triggering a situation where these volatility based funds would end up selling an expensive M1 and buying a cheaper M2 for that day. This becomes a tailwind for the price of UVXY, TVIX and VXX.

Hence, it is of utmost importance that one pays attention to the VIX futures graph on days like this.

Importance of Position sizing

It also highlights the importance of position sizing and the availability of 50% cash in your portfolio, which would help one ride the storm.

What are the Options, if the VIX Futures graph inverts?

One is presented with 3 choices as discussed in Chapter 16 of my trading Volatility book – if the VIX Futures graph has a downward slope. In fact, these options would have to be considered even if we see a V shaped VIX futures graph – meaning M1 to M2 is downward sloping and M2 to M8 is upward sloping.

If you have not read our book, you can download the same from our website: 
http://IndexInvesting.xyz 
(Please note that we are retiring our other website http://TradingVolatility.info)

How to recover from SVXY?

Our good friend Ron Grace has prepared a presentation which we want to share. Please review it at

https://docs.google.com/presentation/d/1zNggFlcLVEr7HnYHQlLcx91g8KBf61HrDwY8dl8lG9g/edit?usp=sharing_eip&ts=5a6fd6b9

It is relevant for SVXY for the past few days, where we have seen some good drawdown.

Thanks a lot Ron for this presentation.

Ron has sent us more presentations like this, which we will share in the days to come.

Conclusion

UVXY has fallen from $41 million dollars to $11.75 in 7 years. On days like this, please try to remember this fact!!

Thanks and Happy Shorting Volatility

http://IndexInvesting.xyz 

Even if one life is changed by our educational attempts, we would consider our efforts in writing the book a success.

The material in this newsletter, the website http://IndexInvesting.xyz as well as in the book "Trading Volatility - Using the 50-30-20 Strategy" is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. As an investor, you are fully responsible for any investment decision that you make.