Strongest Seasonal VIX Buy Signal of the Year is Here

The June 23 Profit Radar Report featured the following VIX analysis:

“The VIX closed below the lower Bollinger Band for the first time since June 6, 2014. It is at the general support zone at 12. The next support zone is at 11. A close back above the lower Bollinger Band will be a buy signal.

VIX seasonality is soon turning higher for the best VIX seasonal signal of the year. Profiting from a rising VIX is always made tougher by contango, which persistently erodes returns of VIX related ETFs like VXX. Nevertheless, the best VIX buy signal of the year appears imminent. We would certainly be buyers at 11. For now, we’ll place a buy limit order (small initial amount) for VXX at 16.90.”

The significance of the close below the lower Bollinger Band was enhanced by VIX seasonality.

Seasonality is not an exact science, but 24 years of VIX history have carved out certain patterns that repeat more often than not.

One of those patterns is an early July VIX bottom.

The chart below plots the VIX against VIX seasonality. Click here for VIX seasonality chart.

Thanks to Greece, the VIX bottom may have arrived a few days earlier, making it tougher for latecomers to buy at the bottom.

Nevertheless, the VIX seasonality chart suggests we may see another opportunity to buy VIX related ETNs like the iPath S&P 500 Volatility ETN (NYSEArca: VXX) or VelocityShares Daily 2x Short-term Volatility ETN (NYSEArca: TVIX) next week.

 

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VIX Hits Another 88-Month Low – Is it Finally Time to Buy?

Traders have been itching to buy the VIX. However, the VIX has frustrated anyone impatient enough to buy bullish VIX bets … so far at least. Here is why the VIX wasn’t ready to rally yet, and why this is about to change.

Patience is a beautiful flower, but it doesn’t grow in every garden.

Patience is also an attractive character trait, but it doesn’t come easy. In fact, patience is perhaps the most underrated requirement for a successful trader or investor.

Few things get contrarian investors as excited as 52-week lows. But forget about 52-week lows, the VIX has been flirting with 7-year lows since May. The iPath S&P 500 VIX Short-term VIX ETN (NYSEArca: VXX) has seen many successive all-time lows.

How often do you get an opportunity to buy at an all-time low?

Not surprisingly, investors have been itching to buy the VIX, but like a stubborn mule the VIX continues to inch lower trampling on premature longs.

A big (impatient) ‘itch’ was reported by Bloomberg on May 21: “Trader Spends $13 Million Betting VIX Index Will Surge 56%.”

I commented on this bold bet in a May 23 article, stating that: “The odds of this bullish VIX trade paying off are not good.” Why?

There were three main reasons:

1) The VIX sliced below key support on May 21. The May 18 Profit Radar Report warned that: “Key support for the VIX is at 12. A move below 12 would suggest further up side for the S&P 500 (and down side for the VIX).”

2) Contango. Bullish VIX investment vehicles suffer from contango, which is caused by continuously rolling over the next VIX futures (tomorrows VIX futures are almost always more expensive than today’s). This condition persistently eats away at bullish VIX related investments.

The May 21 Profit Radar Report cautioned against buying the VIX: “The VIX is a tricky ‘character.’ Due to contango it takes impeccable timing and a 10 – 20%+ move to make money from a rising VIX.”

The chart below plots the VIX against the VXX ETN and highlights the magnified price erosion of VXX. The VelocityShares Daily 2x VIX Short-term ETN (NYSEArca: TVIX) suffers from the same condition. The VelocityShares Daily Inverse VIX ETN (NYSEArca: XIV) on the other hand benefits from contango.

3) This is the most important reason for a lower VIX until now: VIX seasonality suggested continued weakness. The May 21 Profit Radar Report pointed out that: “VIX seasonality is not yet supportive of higher VIX readings,” and featured an invaluable VIX seasonality chart.

VIX bulls will be happy to find out that VIX seasonality is soon turning bullish. This VIX seasonality chart is normally only available to subscribers of the Profit Radar Report. However, due to many requests a free VIX seasonality chart, that highlights the bullish turnaround day, has been made available here:

This page will also include a link explaining why the 1,955 level is crucial for the S&P 500 (NYSEArca: SPY). How the S&P 500 reacts is important to VIX movements.

The Only Free & Updated VIX Seasonality Chart

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

VIX at 88-Month Low – How Much Lower Can it Go?

The VIX closed at an 88-month low today. Many have already gotten burnt betting on higher VIX readings, and many more are itching to place their bet. How much lower can the VIX go? That’s probably not the most important issue to worry about.

The VIX just closed at 10.73, the lowest level since February 2007. How much lower can it go? That’s a good question, but perhaps not the right question to ask.

This little factoid is probably more useful for financial geek trivia than an actual target, but the VIX all-time low was at 8.89 on December 27, 1993 (see VIX chart below).

$13 Million Record Bet Gone Bad

On May 23, I wrote a commentary about a trader who placed a bullish $13 million VIX bet (click here for my original VIX commentary). In my humble opinion that was an ill-timed gamble for a number of reasons:

  1. On May 18 the VIX slipped below a support cluster at 12. The May 18 Profit Radar Report (where I share most of my research) proposed that: “A move below 12 would suggest further up side for the S&P 500 (NYSEArca: SPY) and down side for the VIX.”
  2. VIX seasonality pointed still lower. The May 21 Profit Radar Report featured a VIX seasonality chart and stated that: “VIX seasonality is not yet supportive of higher readings” (details on how to obtain a free VIX seasonality chart shown below).
  3. The same Profit Radar Report warned of the ‘contango trap.’ Contango persistently erodes bullish VIX bets about 80% of the time. The actual creator of the VIX just warned of this contango trap today (CNBC: “A Warning from the ‘Father of the VIX”).

Most VIX related ETFs and VIX ETNs that profit from higher prices – like the iPath S&P 500 VIX Short-term Futures ETN (NYSEArca: VXX) and VelocityShares Daily 2x VIX Short-term ETN (NYSEArca: TVIX) – suffer from contango-caused profit erosion.

VIX ETFs and ETNs like the VelocityShares Daily Inverse VIX Short-term ETN (NYSEArca: XIV) benefit from contango (of course the time to buy XIV is when the VIX is high, not low).

How Low Can the VIX Go?

The VIX is at a 7+ year low and obviously could jump at any given time. However, as long as trade remains below resistance at 12, it may also continue to drift lower or sideways.

In fact, I think that sideways trading, lack of a real up side punch and contango may be a bigger problem for bullish bets than continued down side (it takes a 10%+ move to neutralize contango and make decent money on bullish VIX trades).

Perhaps the strongest argument for a rising VIX comes from the S&P 500. Two normally reliable sentiment indicators just reached multi-year bullish (bearish for stocks) extremes.

Here is a closer look at those two sentiment gauges and what the extreme readings mean for the S&P 500 and VIX (the article also includes a link to the only free and updated VIX seasonality chart available online).

Two Sentiment Gauges Reach Multi-Year Bullish Extremes

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Record Gamble: Trader Spends $13 Million on Bullish VIX Bet

This is at least the second double digit million dollar bet on the VIX this year. The first one paid off big, but the odds of this $13 million dollar trade turning profitable aren’t quite as good. Here are four reasons why:

Based on Bloomberg data, an unknown trader paid almost $13 million to buy VIX call options.

Options provide leverage not available via ETFs or ETNs like the iPath S&P 500 Futures ETN (NYSEArca: VXX) or VelocityShares 2x VIX ETF (NYSEArca: TVIX).

This is a bold bet for a number of reasons:

  1. The trade will only be successful if the VIX rallies at least 56%.
  2. Contango incrementally and persistently eats away at long VIX trades (see below for explanation of VIX contango).
  3. The VIX broke below support at 12. The May 18 Profit Radar Report stated that: “Key support for the VIX is at 12. A move below 12 would suggest further up side for stocks.”

At the beginning of the year, on January 28, an unknown trader placed an even bigger $18 million bet on a falling VIX. At the time the VIX traded around 19.

In an article titled: “Record Bet: Trader Sells $18 Million in VIX Calls,” I outlined three reasons why this was a smart bet.

  1. As the January 28 Profit Radar Report highlighted, VIX resistance was at 18.60 – 20.20. Going short against resistance always provides a low-risk entry (assuming a stop-loss is set above resistance).
  2. Contango: Contango provides head wind against bullish bets, but tail wind for bearish bets (click above link for detailed explanation of contango, and how much profit it erodes each day) .
  3. S&P 500 lows are often accompanied by VIX divergences, which means that the VIX often does not spike to new highs even if the S&P 500 (NYSEArca: SPY) drops to new lows.

Obviously, the bearish $18 million bet in January paid off handsomely. I don’t think the odds of this bullish VIX trade paying off are as good.

VIX seasonality has not yet bottomed and projects even lower readings. The VIX seasonality chart pinpoints the seasonal bottom and best time to buy the VIX.

More information along with the only free and updated VIX seasonality chart on the web is available here:

The Only Free and Updated VIX Seasonality Chart

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Record Bet: Trader Sells $18 Million in VIX Calls

Trading is tough business, but trading the VIX is even tougher, because you are betting ‘against the house’ many times. Here’s how to avoid the force that eats into your profits and make it work for you.

Based on Bloomberg data, an unknown trader sold about $18 million in VIX (Chicago Options: ^VIX) calls on Monday.

At the time of the trade execution the VIX was trading near 19. Many of the sold calls had a strike price of 22 with February expiration.

This is a gutsy trade, but is it gutsy smart or gutsy stupid?

The seller of a February 22 VIX call commits to selling the VIX at 22 on or before the third Friday of February. Obviously,  no one wants to buy the VIX at 22 as long as it trades below 22.

Therefore, the above trade will be profitable (seller gets to keep the premium) if the VIX remains below 22.

Based on the weight of evidence, this is a smart trade for the following reasons:

1. The VIX chart below (published in Sunday’s Profit Radar Report) shows overhead resistance at 18.60 and 20.30.

Sunday’s Profit Radar Report proposed that: “Resistance at 18.60 – 20.20 should cap the immediate VIX up side.”

2. The VIX often peaks before the S&P 500 bottoms, creating a positive divergence. This means that even another minor S&P 500 (NYSEArca: SPY) low may not translate into a higher VIX high.

3. Bearish VIX strategies benefit from contango.

Contango is a condition where the VIX futures (price of VIX in the future) trade at a higher price than the VIX spot price (current price). Contango is in essence a premium. The further away the expiration of the futures, the higher the premium.

Some research on the iPath S&P 500 VIX Short-term Futures ETN (NYSEArca: VXX) suggests that the cost of contango is about 0.25% – 0.45% per day. Contango usually occurs when the VIX trades below 25.

The opposite is true as well. Contango erodes gains of bullish VIX strategies.

To illustrate: For my personal account (more or less as an experiment) I bought a March 12 VIX call, which gave me the right to buy the VIX at 12. I bought the call on January 13 for $3.20 when the VIX traded at 11.84, and sold it on January 27 when the VIX traded at 18.40.

The VIX surged 55%, but my VIX call, a highly leveraged vehicle, gained ‘only’ 40%.

The iPath S&P 500 VIX ETN (NYSEArca: VXX) gained a maximum of 20% over the same period of time, and the 2x leveraged VelocityShares Daily 2x VIX ETN (NYSEArca: TVIX) returned no more than 37%.

Keep in mind that this was an extremely well timed VIX trade. If you get the timing wrong, contango will eat into profits and emphasize losses.

The VelocityShares Daily Inverse VIX ETN (NYSEArca: XIV), an inverse VIX ETN, tends to benefit from contango when the VIX is trending lower. XIV somewhat mirrors the call selling strategy explained above.

Based on S&P 500 analysis, the VIX is in for a rocky ride … and many profit opportunities. Here are three reasons why:

Watch for Bounce! But 3 Reasons Why a Longer Correction is Likely

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

VIX Ratio Shows Less Short-term Than Long-term Fear

Just about every investor is familiar with the VIX. What many don’t know is that there is a short-term VIX and a longer-term VIX. Calculating the ratio of the short-and long-term VIX shows us if volatility traders are more concerned about the short or long-term.

Here’s a unique take at the CBOE Volatility Index or VIX in correlation with its lesser-known cousin, the CBOE S&P 500 3-month Volatility VXV (Chicago Options: ^VXV).

The VIX (NYSEArca: VXX) is a gauge of expected volatility for the next month.

The VXV is a gauge of expected volatility for the next three month.

The VIX / VXV ratio lets us know if volatility traders are more concerned about the short-term (1 month) or long-term (3 month).

As with most everything VIX related, this works better as a contrarian indicator.

The S&P 500 / VIX / VXX Ratio chart below plots the S&P 500 (SNP: ^GSPC) against the VIX/VXV Ratio.

As of Friday, the VIX/VXV Ratio dropped to 0.87. This basically means that volatility traders expect less volatility over the month compared to the 3 month.

The ratio is not yet extreme, but it’s close to the 0.856 reading that coincided with the September high.

Since 2011, the S&P 500 (NYSEArca: SPY) has struggled when the VIX/VXV ratio was around and below 0.82.

Based on the VIX/VXV Ratio, the S&P 500 is approaching a level where caution is warranted. Further insight is provided by VIX seasonality.

VIX Seasonality

The last time we looked at our proprietary VIX seasonality chart was on October 8. At the time, VIX seasonality suggested a minor VIX (NYSEArca: TVIX) high and a bounce for stocks.

VIX seasonality kept us on the right side of the trade in early October, but the real big seasonal VIX turning point is still coming up.

The VIX seasonality chart (available here: VIX seasonality chart) highlights the second-best seasonal VIX trade of the year.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

VIX Jumps Above 5-Year Old Trend Line Resistance

Investors have been complacent for most of 2013, but this changed quickly. A, thus far, fairly shallow 4% decline in the S&P 500 has investors scared enough to drive the VIX above a previously unconquered 5-year old resistance level.

Fear is back for the first time since June, when the S&P 500 (SNP: ^GSPC) dropped 127 points and the VIX soared as much as 78%.

This time around, the S&P 500 (NYSEArca: SPY) has only dropped 68 points, but the VIX (NYSEArca: VXX) is already up 63% (since September 19).

In other words, investors are more shaken up by the 68-point post September drop than the 127-point June drop. What does this mean?

There are two possible interpretations:

1) The VIX is already overbought and ripe to move lower or

2) As the chart below shows, the VIX just broke out above two trend lines, one going back to October 2011, the other going all the way back to October 2008.

The large grey oval shows what happened the last time the VIX broke above a similar trend line in May 2013.

The dotted red lines mark near-term resistance for the VIX.

Based on the May breakout pattern there is more up side for the VIX (NYSEArca: TVIX), but to unlock this up side potential the VIX needs to move above near-term resistance first.

Perhaps more insightful than the VIX chart at this point is VIX seasonality. The VIX is about to hit the most important turning point of the season.

VIX seasonality is discussed here: VIX Seasonality Near Best Turning Point of the Year

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.