Friday, December 3, 2010

When the VIX is up 20% on the Week... Review of a Study

I did a little study based on the VIX action last week. It shot up over 20% for the week and was up a hefty 10% on the last day of the week. The market was sliding a bit and fear was rising. What did that usually mean for VIX and SPY prices over the next 5 days? The results indicated that volatility would probably contract and fear would calm down. It also indicated that the SPY had about an 80% chance of being positive, with average gain over 1%. Here is what happened this week [deploying a hypothetical $10,000].


Buy VIX on Friday 11-26-10, sell this week
Ticker
Date
Price
Ex. date
Ex. Price
Profit
% Profit
VIX
11/26/2010
    22.22
11/29/2010
    21.53
    (311)
-3.11%
VIX
11/26/2010
    22.22
11/30/2010
    22.42
        90
0.90%
VIX
11/26/2010
    22.22
12/1/2010
    20.40
    (819)
-8.19%
VIX
11/26/2010
    22.22
12/2/2010
    19.39
 (1,274)
-12.74%
VIX
11/26/2010
    22.22
12/3/2010
    18.01
 (1,895)
-18.95%


The VIX Index came down pretty hard, really diving into week end.

To take advantage, you could utilize any form of VIX instrument [a bunch of new ones have hit the market, see Vix and More]. The VIX is very complex, but a simple approach would be to short VXX.


Short VXX on Friday 11-26-10, cover this week
Ticker
Date
Price
Ex. date
Ex. Price
Profit
% Profit
VXX
11/26/2010
    45.76
11/29/2010
    46.10
      (74)
-0.74%
VXX
11/26/2010
    45.76
11/30/2010
    49.29
    (771)
-7.71%
VXX
11/26/2010
    45.76
12/1/2010
    46.95
    (260)
-2.60%
VXX
11/26/2010
    45.76
12/2/2010
    43.31
      535
5.35%
VXX
11/26/2010
    45.76
12/3/2010
    41.30
      975
9.75%


If you went short on Friday, it would have been a bumpy road through Wednesday. But by the end of the week, it would've been a sizable gain, depending on your exit strategy.

Or just go straight to the SPY.


Buy SPY on Friday 11-26-10, sell this week
Ticker
Date
Price
Ex. date
Ex. Price
Profit
% Profit
SPY
11/26/2010
  118.80
11/29/2010
  119.60
        67
0.67%
SPY
11/26/2010
  118.80
11/30/2010
  118.49
      (26)
-0.26%
SPY
11/26/2010
  118.80
12/1/2010
  121.01
      186
1.86%
SPY
11/26/2010
  118.80
12/2/2010
  122.56
      316
3.16%
SPY
11/26/2010
  118.80
12/3/2010
  122.89
      344
3.44%


For me, it is just a matter of acting on the studies and the signals they provide. It's much easier said than done. Always a work in progress. I personally failed at my attempt to use VXX puts. I ended flat but should have had a healthy profit. A very disappointing end to a rough week for me (see DECK). But move on and look for more opportunities next week.

Serenity Now!

www.mattludin.com

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