At the end of September, I resumed my short Barclay’s Bank iPath S&P 500 VIX Short-Term Futures (VXX) – long Barclay’s Bank iPath S&P 500 VIX Mid-Term Futures (VXZ) strategy. Mid-term VIX futures (VXZ) were less elevated and provided a better hedge for VXX. I will hold this pair through October as long as mid-term VIX futures do not rise significantly higher than short-term VIX futures.
As I highlighted in my August commentary, I will maintain short VXX / long VXZ positions as long as the average of the fifth and sixth-month VIX futures does not rise more than 35% above first- month VIX futures.
VXZ does not effectively hedge VXX when VIX futures ratios are above 35%, due to the following:
a) Short-term VIX futures tend to be below their mean-reverting level but
b) Mid-term VIX futures tend to be at least equal to their mean-reverting level
c) Impact from combining a) and b) is short-term VIX futures tend to rise while mid-term VIX futures stay constant
Therefore, if this ratio exceeds 35%, then I will switch back to a short VXZ position.
Get to know Robert:
The investments discussed are held in client accounts as of September 30, 2012. These investments may or may not be currently held in client accounts.The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Covestor believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.