Author: Robert Zingale
Covestor model: Volatility Mean Reversion
Disclosure: Short VXX
Although June saw a great deal of volatility, VIX closed only 6.9% higher on June 30th from its close on May 31st. iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) lost 0.7% between its May 31st close and June 30th close. The drop in VXX was due to relatively unchanged VIX future prices and an upward sloping term structure over the period.
According to Covestor calculations, my model gained 0.64% over this period, while the Dow Jones US Aggressive Index was down 1.92% and the S&P 500 was down 1.83%.
Similar to last month, I still expect VIX to be moderately higher in July and VXX to remain relatively unchanged or slightly higher.
VIX Index Forecast
Based on the VIX futures term structure and current market conditions, I expect a moderate increase in the VIX to levels between 20-24, with the possibility of a large spike.
VXX Forecast
I expect the 2-month to 1-month VIX future differential to be around 5%-7% as VIX futures remain below their mean reverting level.
Based on my expectations for VIX future prices and the shape of the term structure, VXX is likely to be flat or slightly higher in June.
Current Position Rationale
I will maintain my current (as of 7/1) ~15% short position against the VXX to aim to gain from the current upward sloping term structure of the VIX futures. I have no immediate plans to add any more short exposure, because price risk of the VXX is high given future VIX expectations in the market. However, if the VIX index goes above 25, I will double my exposure to 40%. My additional 25% exposure would aim to gain from a decrease in VIX price as it reverts back down to its mean-reverting level and from the likely future upward sloping term structure.
Sources:
VIX data from CBOE, http://cfe.cboe.com/Products/historicalVIX.aspx
VXX data from Google Finance, http://www.google.com/finance?q=Vxx
