3 Tricks for Trading the VIX

More than any other asset class, the Volatility Index (VIX) is subject to distinct patterns or biases that either help or hurt investors.

Being aware of the 3 VIX tricks discussed below will significantly increase the odds of a winning trade.

1) VIX Seasonality

I invite you to inspect the VIX seasonality chart below. Based on 25 years of trading history, there are two important seasonal turning points: July 2 and October 9.

The VIX has a strong tendency to move higher starting in early July (green arrow), and to move lower after early October (red arrow).

For example, the June 23, 2015 Profit Radar Report stated that: “The VIX closed below the lower Bollinger Band for the first time since June 6, 2014. 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.”

Shortly thereafter the VIX rallied from 12 to 20 and eventually to 50.

Due to the massive summer spike, this year’s October sell signal was shifted.

Nevertheless, the November spike (last chart, red arrow) offered a good setup to short the VIX, as the November 16 Profit Radar Report brought out: “The VIX closed below the upper Bollinger Band, which is a sell signal.”

The October sell signal is particularly intriguing because it gets magnified by a major bias of inverse VIX ETPs (Exchange Traded Products, such as ETFs and ETNs). This bias can be worth 0.25% per day for weeks.

2) Inverse VIX Bias

ETPs like the iPath S&P 500 VIX ETN (VXX) or the VelocityShares Daily Inverse VIX ETN (XIV) use futures (or options) to replicate VIX-related performance.

The performance of futures-based ETPs is typically cannibalized by a condition called contango. However, a bet on lower VIX prices allows investors to turn this generally harmful condition into a superbly beneficial tail wind.

Below is an admittedly dry explanation of contango, but I think you will find it well worth your time (no pain, no gain).

The VIX quoted in-day-to-day life is the CBOE Volatility Index (VIX) spot price (today’s VIX price). However, the futures used to create VIX ETPs are based on the future VIX price, which is almost always more expensive than the spot price. Over time the more expensive VIX futures decline in value, eventually converging with the spot price at expiration.

As time goes by, ETF providers are forced to continuously replace expiring futures with new (more expensive) futures (this process is called ‘rolling over’). The further away the futures expiration date, the bigger the time premium. This time premium and resulting value decay is called contango.

Contango generally exists when the VIX is trading below 20. The opposite of contango – backwardation, when future VIX prices are lower than at present – generally appears when the VIX trades above 20.

I wrote a detailed report on how to actually make contango work for investors back on August 24, 2014 (entire report available to subscribers of the Profit Radar Report).

Below are some of the findings and charts shared in this report:

The two biggest beneficiaries of the ‘reverse contango’ benefit are the VelocityShares Daily Short-term VIX ETN (NYSEArca: XIV) and ProShares Short VIX Futures ETF (NYSEArca: SVXY).

The chart below compares the VIX with its inverse counter part, XIV. Shown is the cumulative percentage return from January 3, 2011 to August 15, 2014.

It quickly becomes obvious that XIV has risen much more than the VIX has fallen.

XIV is an inverse VIX ETN. For an apples to apples analysis of the excess return, here is a comparison between XIV and an inverse VIX (the VIX inversed).

  • Of the 911 trading days from January 3, 2011 to August 15, 2014, the inverse VIX had 484 up days and 427 down days. The inverse VIX had 1.13x more up than down days.
  • The average gain of 484 up days was 4.55%. The average loss of 427 down days was 5.85%. The average loss was 1.28x greater than the average gain.
  • Of the 911 trading days from January 3, 2011 to August 15, 2014, XIV had 522 up days and 389 down days. XIV had 1.34x more up than down days.
  • The average gain of 522 up days was 2.63%. The average loss of 389 down days was 3.18%. The average loss was 1.21x greater than the average gain (see figures 5 and 6).
  • From January 3, 2011 to August 15, 2014, XIV outperformed the inverse VIX by 217% (0.24% per day).

Obviously the reverse contango benefit doesn’t guarantee a profitable trade, but on average XIV provides a ‘daily edge’ of 0.25%. At times, the edge is much more pronounced, such as on November 30, 2015, when the VIX rose 6.68%, but XIV gained 0.74% (when it should have lost some 6.68%).

VIX Technical Analysis

As you may have noticed from the two above Profit Radar Report quotes, the Bollinger Bands can be very helpful when it comes to spotting buy/sell signals, especially when they occur near the two major seasonal turning points (see chart below).

Simple support/resistance levels and trend channels can also be of help. The green/red arrows below highlight the buy/sell signal given by the Profit Radar Report.

Summary

Seasonality and technical analysis triggered a VIX sell signal on November 16.

The sell signal remains active and the ‘contango tailwind’ should by overall positive for XIV until late December.

However, for the first time since the start of the 2009 bull market, we are seeing signs of distribution (liquidity is drying up). This could become an issue when the next (bullish) VIX turning point arrives.

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 and 17.59% in 2014.

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

VIX Seasonality Approaching Key Inflection Point

Based on seasonality, there are two particularly important dates for VIX traders:

  • Early July
  • Early and late October

July marks the best VIX buying opportunity of the year.

October marks the best VIX selling opportunity of the year.

Our VIX seasonality chart is based on 25 years worth of daily closing price history.

The chart below compares VIX seasonality with actual 2014 VIX performance.

The major seasonal VIX turning points were spot on in 2014 (the Profit Radar Report pointed out both of them).

The second chart compares the 2015 year-to-date VIX with VIX seasonality.

The seasonal 2015 VIX low arrived a bit early (June 23 instead of July 2).

However, the June 18 Profit Radar Report observed that: “The VIX closed at 10.57 today, the lowest reading since February 26, 2007. Today’s close was 0.04 point below the lower Bollinger Band at 10.61, suggesting that the VIX is oversold. A close back above the lower Bollinger Band is generally considered a buy signal.”

The summer VIX spike occurred during the time of year where the VIX is expected to rise.

The actual VIX high, however, occurred before the October seasonal high. Based on seasonality, there should have been another VIX spike in October. There are still a few days left for the VIX to turn lower, but the August panic VIX high certainly won’t be exceeded in 2015.

Seasonality is pointing towards lower VIX readings until mid December.

However, I would be remiss not to mention that big outlier moves, like in August/September, may alter the ideal VIX path.

That’s why the Profit Radar Report augments seasonal research with technical and sentiment analysis.

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 and 17.59% in 2014.

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

VIX Seasonality Sports Brief Bearish Window

The CBOE Volatility Index, or VIX, has been following its general seasonal pattern rather closely, especially since the seasonal VIX low in July. Within a larger seasonally bullish period, there is a brief bearish window that may draw the VIX lower.

VIX seasonality has been an indicator worth watching.

The VIX seasonality chart projected a major seasonal low on July 9.

On July 10, the VIX spiked as much as 9.8% and on July 17, the VIX soared as much as 41.7%.

From the July 2 low at 10.28 to the August 1 high of 17.57 the VIX gained 71%.

Despite bullish VIX seasonality, the early August spike seemed overdone. The August 1 Profit Radar Report stated that:

“The VIX spiked 27% today, a kneejerk reaction similar to that of July 17. We would actually like to see another VIX spike sometime in August, and if we do we will likely buy the VelocityShares Inverse VIX ETN (NYSEArca: XIV). XIV benefits from a declining VIX.”

Here are some interesting behavioral VIX nuances:

  • Although the S&P 500 (NYSEArca: SPY) saw another low on August 7, the VIX high of August 1 remain intact.
  • Although the August 1 VIX high remained in tact, XIV dropped to another low on August 7 (the August 6 Profit Radar Report recommended to buy XIV at 35.10).

The chart below plots the VIX against XIV. Sideways trading following the August 1 VIX high resulted in lower XIV prices.

This deviation is caused by contango. Contango generally favors bearish VIX bets. Click here for a detailed explanation of contango.

Summary:

  • The VIX seasonality chart allows the following conclusions:
  • July 9 – October 9 are bullish for the VIX.
  • Within this bullish 3-month zone, there is a brief window of bearish seasonality from August 7 – August 22.
  • Any VIX rally into early October should provide a good opportunity to short the VIX.

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 Seasonality Triggered Major Buy Signal on July 9

The VIX has been trending lower for weeks on end. Many investors got burned trying to be ahead of an elusive VIX rally … until yesterday. The 32% one-day spike came right on queue, according to the VIX seasonality low.

You might as well call me a broken record. For the last few months, I’ve continually advised to postpone VIX buying until after July 9. Why July 9?

Allow me to explain by quoting the June 18 Profit Radar Report: “VIX seasonality doesn’t bottom until July 9, so it seems too early for a sustainable VIX rally.”

The June 6 Profit Radar Report featured the VIX seasonality chart along with this comment: “The VIX seasonality low arrives around July. Forward looking indicators, such as the SKEW and VIX seasonality, suggest that the S&P 500 should soon run into trouble.”

The VIX seasonality chart plots this year’s VIX performance against the ‘average’ VIX performance based on daily closing prices from 1990 to 2013. VIX ETPs like the iPath S&P 500 VIX ETN (NYSEArca: VXX) and ProShares Ultra VIX Short-term ETF (NYSEArca: UVXY) lost between 28 – 78% in 2014.

However, the VIX spiked 32% on Thursday. This is a massive overreaction, considering that the S&P 500 (NYSEArca: SPY) declined only 1.18%.

We’ve seen similar VIX kneejerk reactions in the past, and they were soon followed by a lower VIX and higher S&P. Will this time be different?

Will the VIX continue to rally and the S&P finally embark on the much advertised correction?

Only if the S&P 500 drops below key support. Thus far the S&P bounced three times from this support, and VIX downside is limited as long as it holds.

Here’s a detailed look at this S&P 500 key support level:

Short-term S&P 500 Forecast: S&P Bounces at Support

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.

 

The Only Free and Updated VIX Seasonality Chart

The VIX is trading near 7-year lows and two VIX ETFs are at all-time lows. Many are itching to buy the VIX and while such a trade may well be profitable, VIX seasonality provides another layer of information for a low-risk trade.

When is the best time to buy or sell the VIX or VIX ETFs/ETNs?

There are multiple ways to find decent entry points. The effectiveness of every single one of them can be enhanced by VIX seasonality.

Consider seasonality another layer of tradable information, just as you may use a mobile weather app to crosscheck what the meteorologist says on local TV.

The VIX seasonality chart below is based on daily VIX data from 1990 – 2013 and was featured in the May 21 Profit Radar Report (Profit Radar Report subscribers get complimentary access to carefully crafted seasonality charts for the S&P 500, Apple, gold and VIX).

A major seasonal VIX low is usually due towards the beginning of July. Major tops tend to form in October.

Currently the VIX is flirting with a 7-year low. The iPath S&P 500 VIX ETN (NYSEArca: VXX) and VelocityShares 2x VIX ETN just slid to (another) all-time low.

Based on the VIX’s depressed level and spread between current trade and the 50-day and 200-day SMA, it’s almost certain (based on historic precedences) that VIX will climb towards 15 sometime before September.

It is tempting to buy the VIX at current levels (someone actually bought $13 million worth of VIX calls around 12, more below). Is this a good idea?

The VIX is trading just around support at 12 and a number of indicators suggest a S&P 500 correction. Lower S&P 500 (NYSEArca: SPY) generally translates into higher VIX.

However, the VIX seasonality chart cautions that we may see even lower VIX prices in early July. This doesn’t mean the VIX can’t rally now (based on some indicators it should rally), but seasonality cautions that any rally may be muted and/or reversed.

Odds of a successful trade increase if we get another chance to buy the VIX at depressed levels in a month or so.

Regardless of seasonality, one trader decided now is the time to load up on VIX calls, $13 million worth to be exact.

Seasonality does not yet support the bullish bet, but there are three other reasons suggesting some sleepless nights for the $13 million trader. More details here:

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

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.

S&P 500 Hits 2009 Projection Target – Resistance or Springboard?

The S&P 500 has finally reached its up side target outlined by a trend channel going all the way back to 2009. Is this the bull market’s final destination or just a ‘layover’ before departing for new bull market highs?

The S&P 500 (SNP: ^GSPC) has rallied 100 points in the last 10 days.

That’s nice trivia, but the weekly S&P 500 bar chart (figure 2) shows something more significant.

The S&P 500 (NYSEArca: SPY) has finally reached trend channel resistance going all the way back to the March 2009 low.

This trend channel served as a natural magnet for prices, that’s why the Profit Radar Report has been following the channel since early 2013.

The July 14, Profit Radar Report featured two possible paths the S&P 500 could take to ultimately reach the channel.

  1. “A brief correction followed by the next rally leg to 1,700 – 1,750 (purple projections). Somehow my gut tells me it won’t be that easy.”
  2. “A prolonged period (4 – 8 weeks) of frustrating and unpredictable range bound up and down moves (blue projections) may be the markets way to play cat and mouse with investors and digest the strong gains since November 2012 and June 24, 2013. The longer the sideways action, the higher the next target (due to the ascending trend channel).”

The S&P 500 (NYSEArca: IVV) chose option #2, the cat and mouse path. But regardless of the path, the destination has been reached. What now?

Mission Accomplished

The S&P 500 has captured the long-standing Profit Radar Report’s up side target and accomplished this mission.

As the chart shows, the upper line of the trend channel has acted as natural resistance for the S&P 500 (NYSEArca: VOO) in the past and repelled stocks.

But past performance is no guarantee of future results.

If the S&P 500 is going to reverse, it should do so right around trend channel resistance. In fact, the effect of the channel resistance is being felt today.

However, I am seeing a number of indicators that suggest any reversal will be only temporary in nature, with the growing potential of higher price targets.

One indicator that suggests continued (although not uninterrupted) strength for the S&P 500 is VIX (Chicago Options: ^VIX) seasonality. In fact, VIX seasonality is quite pronounced.

A simple but comprehensive VIX seasonality chart is available here: VIX Seasonality Chart

As always, I will share my findings and buy/sell signals via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report.

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