• Sharebar

I remember the summer of 1998 when crude oil was putting in new lows almost daily. At one point it went below $12 a barrel, which is roughly what it cost at the time to pull it out of the ground. Think about that for a minute: for a brief time oil was worth more right where it was beneath the Saudi sand than it was in the tank of your car. I remember going over Unleaded Gas charts with clients and telling them, "You see where the lowest point gas has been in the history of trading on the chart? Yeah, take your pen and make a mark on your desk about two inches below the sheet of paper, cuz that's where it's trading right now."

It's easy to look back on that time and say, "Well, duh. Of course you should've been buying. How much lower could it go?" and you'd be right. (just for your reference, gas at the pump was as low as $.70 a gallon in some places) But I can tell you that it wasn't an easy sale for a lot of people. It was just so low that many clients, some pretty sophisticated, wanted nothing to do with it. Fortunately I built a huge position and it began the roll that led to my retirement a year later.

I'm starting to wonder if we're not seeing a similar opportunity in today's VIX. The VIX has been stupid low for the past couple years. Even after yesterday's 14% jump, the VIX remains below its 50 and 200 day moving averages. With the market putting in 6-year highs and rallying more than 5% YTD, I wonder if everyone has been lulled into a false sense of security and is about to lose a big chunk of their ass to the bite of the VIX.

If nothing else, it seems like a worthwhile hedge for any long portfolio at this point, but with the availability of levered VIX ETFs, I think there's some real money to be made this year.

I'm not suggesting that another 2008 (when the VIX hit 80) is imminent. Frankly there's nothing out there to suggest that. But with the VIX around 14 (currently), even a return to the average VIX of 20 would be a huge home run in a levered ETF like TVIX.

Is anyone else thinking this? Things have been awfully quiet lately. Is the VIX at 14 the same as crude oil at $12?


The WSO Advantage - Land Your Dream Job

Financial Modeling Training

IB Templates, M&A, LBO, Valuation. Learn More.

Wall St. Interview Secrets Revealed

30,000+ sold & REAL questions. Learn More.

Resume Help from Finance Pros

Land More Interviews. Learn More.

Find Your Mentor

Realistic Mock Interviews. Learn More.

Comments (15)

  • RichardPennybags's picture

    Hah, I literally pitched exactly this in a BB interview yesterday. I think the guy was impressed that I knew what VIX is at all, haha....

    But yeah, seems like a good play, considering all the shit going on pretty much everywhere in the world

    "Every man should lose a battle in his youth, so he does not lose a war when he is old"

  • frooter's picture

    personally, id put on a small position....going long the vix, as you know, is for lack of better concepts, shorting the market, now I would not short the market heavy with all central bank intervention....granted the vix can easliy double or triple, but i think it would be over a few weeks time., I just dont see central banks letting markets going to their true value, and out of their control...Bernanke's position, is wants people to shift form bond market in to equities...hence keeping rates this low.......what do you think my friend?

    essentially your shorting risk....so maybe look to short Euro......Euro too high, just like the Yen, ECB may feel the need to devalue it to make exports more attractive.....

  • SirTradesaLot's picture

    I suggest directly trading options is more efficient than using an ETN like the TVIX. The problem with the VIX based ETNs is that you can be deadly accurate in your call and still lose money because of the negative roll yield, which can cost you 10% a month or more. There is no ETN that trades spot VIX, only VIX futures.

    adapt or die:
    What would P.T. Barnum say about you?


  • mikesswimn's picture

    VIX is a short term index, I think 0-3 months, so whether it's the play for 2013 depends entirely on "what quarter of 2013"? Also, from what I can tell, they're expensive. Take the April 2013 calls with a 15 strike, they're trading near $3, which means that you're looking at a loss unless the VIX jumps +20% in under 90 days. Granted, if you're looking to hedge the S&P, it's a good option from a price perspective when compared to the OEX/XEO.

    But, I wouldn't suggest trying to speculate unless you have a big chunk of cash burning a hole in your pocket. And if you do, just buy the options (see SirTradesaLot's comment). Just my $0.02.

    "My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

  • ricky212's picture

    Why would you trade against such a major trend? A lot of people have been losing money to VIX etns following this exact line of thinking.

    Because when you're in a room full of smart people, smart suddenly doesn't matter--interesting is what matters.

  • duffmt6's picture

    I made a fair chunk of change a couple summers ago in XIV. The problem with VIX ETN's is obviously the negative roll yield - they are designed to go to zero so you need to fucking nail your call, and I'm not that smart. I don't trade options and thus don't think I would ever go long volatility.

    "For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."

  • duffmt6's picture

    Just to add - you guys might want to check out this syndication: http://www.wallstreetoasis.com/blog/118242 and the guy's blog, sixfigureinvesting.com. He does some great stuff on volatility.

    "For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."

  • Edmundo Braverman's picture

    Okay, you guys are right and I should have specified the option play. Options are how I trade all my macro ideas but I realize that wasn't implied in my post and that you'd have to be familiar with the other stuff I've written about to know that.

    So for those wondering: yes, the ETN (or ETF) play is not the way to trade this (unless you're right on the money timing-wise). You definitely want to trade the options on the VIX for the lower outlay of capital and increased leverage (with a limited downside risk).

    Here's what I mean about limited downside in options:


  • samoanboy's picture

    I agree that there is some room for the VIX to jump, but if you look at (VIX INDEX GP) you can see that the market has been at these levels and then fallen further for 18 months at a time (1992 to 1994), (2004 to 2007) - trying to time that badboy is well beyond my skills.....

  • Banker88's picture

    I lost big putting money into VXX this summer as it kept breaking new lows. Was a stupid play and I know should not be a long-term hold given the negative roll yield. But now not sure whether to sell it at a huge loss or wait for a pop...

  • puax's picture

    It might be low, but it's expensive. What's cheap is vol, not VIX. So I'd buy options.

  • In reply to Banker88
    mikesswimn's picture

    To unlock this content for free, please login / register below.

    Connecting helps us build a vibrant community. We'll never share your info without your permission. Sign up with email or if you are already a member, login here Bonus: Also get 6 free financial modeling lessons for free ($200+ value) when you register!

    "My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

  • Bw113's picture