How I’ve navigated through the Euro debt crisis

Author: Robert Zingale

Covestor model: Volatility Mean Reversion

In June, I made two major portfolio adjustments in response to the Euro debt crisis.
First, in early June, I reduced overall volatility exposure. I felt it prudent to reduce exposure to volatility given the uncertainty of the Greek elections and rising Spanish bond yields.

Although short-term VIX futures were displaying high levels of contango, I did not want to potentially ride the VIX futures higher into backwardation. As stated in my previous post, I decided to maintain short volatility exposure through a short position in Barclays Bank PLC iPath S&P 500 VIX Mid-term Futures (VXZ).

Post Greek elections, I increased short volatility positions. After the Greek elections, the risk of a Greek exit from the Euro declined. Therefore, I added back some short positions in Barclays Bank PLC iPath S&P 500 VIX Short-term Futures (VXX) while maintaining my short position in VXZ.

I decided to not create a hedged position consisting of a short VXX position and a long VXZ position, because the mid-term VIX futures were elevated and were also in a high state of contango.

I will continue to closely monitor the global financial markets, the VIX term structure and VIX levels. It is likely that portfolio adjustments will need to be made again in July.