Message exchange with a StockTwits user
On StockTwits, a user message me the following:
In essence, shorting the VIX is the equivalent of selling insurance. When the VIX rises, the price of the policies go up. But backwardation means payouts exceed premiums. As Contango (which is the normal condition) returns, the policies are going to be all the more lucrative.
He wanted my views on the above. This is what I typed:
I agree 100%. We indeed are in backwardation and & I am sitting out with cash until we see Contango & an upward sloping VIX futures graph.
Why I am not shorting UVXY TVIX VXX now
If I had a million dollars cash, and I start with shorting 100 UVXY shares from today as my first transaction, nothing wrong with that. Its all about liquidity and cash management, But, unfortunately, that is not my case.
Why I am not long UVXY TVIX VXX now
These are dangerous tickers. No doubt, in backwardation, there is a tailwind for these tickers. But it does not mean they will go up in backwardation consistently.
Take yesterday’s price of UVXY. Yesterday’s low $18.84. Yesterday’s high $27.91. Today’s pre-market price as I type this $23.41
Remember, UVXY came down from $42 million to $23.41 in 7 years. Highly “untrustworthy” instrument to be long and holding.
Will sitting out help?
I think so. There is no need to trade, just for the sake of trading. I plan to enter into trading volatility when there is an edge in terms of Contango and a upward sloping VIX futures graph.
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