Tuesday, May 31, 2011

Chart of the Week: XIV Celebrates Six-Month Birthday

Yesterday marked six months since the launch of the VelocityShares Daily Inverse VIX Short-Term ETN (XIV).

While XIV’s launch was received with little fanfare, I was a huge fan of this ETN right from the start. Less than one week after XIV was launched, I shared my thoughts about XIV in the Bespoke Investment Group’s second annual roundtable. When asked about some of my favorite picks for 2011 and beyond, I predicted:

“2011 will mark the rise of volatility as an asset class.  Part of the reason for this rise will be the runaway success of VIX-based ETNs and ETFs, notably the recently launched XIV, which will prove that volatility vehicles can be good buy-and-hold investments.”

During the course of its first six months of trading, XIV has managed to return 82% to anyone who was fortunate enough to buy some of this ETN when it launched. As shown in this week’s chart of the week below, XIV's ride has been a wild one and has included a pullback of about 33% in one month during all the turmoil associated with the Japanese earthquake + tsunami + nuclear meltdown.

Looking ahead, I am going to go out on another limb and say that 82% in six months was not a fluke. Sure XIV is an extremely volatile security that will experience sharp drawdowns on a regular basis, but for the patient investor who is able to steer clear of margin issues, XIV can be an excellent way to spice up one’s portfolio with stunning long-term returns.

That being said, just as shorting VXX is a strategy suited to only a small slice of the investment community, so is XIV not appropriate for everyone, in spite of the upside potential. For those who think they may be up to the task, I highly recommend a comprehensive risk management plan and a review of Managing Risk with a Short VXX Position, as well as some of the other links below.

Related posts:

[graphic: StockCharts.com] 

Disclosure(s): short VXX and long XIV at time of writing

Thursday, May 26, 2011

Expiring Monthly May 2011 Issue Recap

A quick reminder that the May edition of Expiring Monthly: The Option Traders Journal was published earlier this week and is available for subscribers to download.

This month’s feature article, Understanding Order Flow, Part One: Reading It, is authored by Mark Sebastian and delves into subjects such as the impact of large trades on implied volatility and skew. Mark will be back with part two of this illuminating feature in the June edition.

Another article that breaks new ground and offers more than a few surprises is Jared Woodard’s Why Black-Scholes Is Better Than We Think, which evaluates how robust the Black-Scholes model is in the context of delta hedging.

One of my favorite parts of the magazine is the interview segment. This month Mark Sebastian interviews TradeKing Chairman and CEO Donald Montanaro. Their conversation traces the history of the discount brokerage industry, the role of options in the discount brokerage world, and the evolution from bricks and mortar to online options trading.

In this month’s issue I am responsible for three articles. The one I enjoyed the most I call Cheating with Partial Hedges, which explores the subject of creating custom portfolio hedges which minimizing cost and risk, while maximizing coverage where it matters most. I also was responsible for the monthly Follow That Trade column. This month I follow a silver and gold pairs trade that combines some bottom-fishing characteristics with a short implied volatility flavor. Last but not least, in the Wolf Against the World column I square off with Mark Wolfinger (whose New Options Trader column is a great resource for those who are new to trading options) to debate the merits of using technical analysis in trading options. My argument relies heavily on the use of TA for position management and exits.

In keeping with tradition, I have reproduced a copy of the Table of Contents for the May issue below for those who may be interested in learning more about the magazine. Thanks to all who have already subscribed. For those who are interested in subscription information and additional details about the magazine, you can find all that and more at (the newly redesigned) http://www.expiringmonthly.com/.
Related posts:

[source: Expiring Monthly]

I am one of the founders and owners of Expiring Monthly

Tuesday, May 3, 2011

SPX Pullback History, 2009-2011

Since there has been only one significant pullback in stocks so far in 2011, I am taking the mild selling from the last two days as an excuse to update a table of pullbacks that I have been updating periodically since stocks bottomed back in March 2009.

The table captures some of the details of the fifteen significant (in magnitude and/or duration) pullbacks in the SPX during the last 26 months, with the current pullback – so far at only 1.5% from peak to trough – highlighted in yellow.

Not counting the current 1.5% dip, the mean pullback has been 6.5% from the peak, with the median coming in at 5.6%. Using these numbers, a median pullback would take the SPX down to about 1294 and a mean pullback would drop the index down to a little over 1286.

A pullback that matches the 17.1% drop from April to June 2010, which is the largest during this bull market, would drop the SPX back all the way to 1136.

As you think about the current selling and the recent propensity for buy-on-the-dip investors to keep most pullbacks from becoming too severe, this bit of historical benchmarking should be able to serve as a guideline for evaluating how deep and how long the next pullback might extend.


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