Learning Markets - Investing education and trading ideas

Profit from a surge in Volatility (TVIX)

by Terrence on December 13, 2011

This Trade Was Closed February 10, 2012

Closing this day trade at $20. 25% gain in one day! Gotta pat myself on the back for calling this one

Original Trade Post:

Long volatility with this 2X VXX ETN.

Per my trade long IWM puts, I have been noticing large amounts of puts being bought in the near month expiration contracts of the IWM and SPY. This is lifting implied volatility market wide.

I jumped on board of this trade at 16 per share late today as I noticed a series of higher lows and higher highs, marking a bullish trend reversal in this security. See the chart notating the series of higher lows, higher highs, preceded by a bullish harami candlestick, and a bullish ROC divergence.

Will be watching closely for weaknesses in the momentum surge to take profits and will have a trailing stop at the 50 period EMA – currently at $15.50. Conservative PT is 17.50.

This trade may last only a few days so be watchful.

Trade Details:

The Ticker: TVIX
The Trade: Buy at $16
Target Price: $20

Trade Opened: December 13, 2011
Trade Closed: February 10, 2012

Chart courtesy Finviz. Click to open in larger window.

Additional Image Provided by Terrence:

Betting on volatility with VIX calls (VXX) in Option Trades (3 comments)

Another TVIX long trade in Stocks and ETF Trades (0 comments)

Deadcat bounce Downside in Google (GOOG) in Option Trades (7 comments)

Trade a pullback on the Apple ecosystem (Long SWKS puts) in Option Trades (3 comments)

Bearish bet on the realities of a Housing Recovery in Option Trades (3 comments)

Using Option Greeks: Implied Volatility

Trading a Short Squeeze

Earnings Season is Here…Find Out How to Trade It

How to Short Bonds

Understanding the Stock Short Interest Ratio

This is not investment advice. Learning Markets, LLC is not responsible for errors or omissions. Please be sure to read our disclaimer.

Ratandrea

r u gonna trade TVIX again?
Truc

What’s your take on credit Suisse halting shares of tvix? Are you still holding long?
- Terrence Chan
  
  The halting of new shares is a bullish short term factor causing tvix to trade at a premium to VXX. That combined with being a good market hedge ate reasons i am still long. I plan to take profits on any quick surge up 19-20.
Terrence Chan

Re-opening a long trade in TVIX today. Volatility is starting to spike as money managers start to buy put protection across the market
- Nicolai
  
  Talk about good timing! It just went off the charts. This is starting to look like panic. I think people should stop buying and selling and go home now and re-think what they want.
  - Terrence Chan
    
    Just closed my TVIX trade at 20. Bought a boat load of AAPL $510 calls at 10.25
    - Terrence Chan
      
      Sold my AAPL calls $510 calls, Bought TVIX at 17.20. These 2 are working inversely right now
      - Nicolai
        
        As I see it right now, healthcare/discretionary/telecom are the only sectors posting a positive “% change from open” so I think it is time to set a stop on the (few) long positions I hold.
        
        I was stopped out of the 80 put on IWM at a small profit, but I think the idea is still warm and want to continue to watch prices.
- Terrence Chan
  
  I just got long USO puts – lower intraday high indicating lack of follow through on the gap up at the open
  - Terrence Chan
    
    I just got long AAPL Feb $525 puts. Calling the top in AAPL. I see an intraday bearish divergence taking place. May be a quick trade
    - Terrence Chan
      
      My long AAPL Feb $525 puts were bought at $7.10 this morning and are now worth $28. My hunch turned out to be very profitable. sorry that I didn’t post an official trade – was in the heat of the moment
      - Nicolai
        
        Excellent call on that parabolic price move Terrence!
        
        But being AAPL, and the mass-hysteria we can expect from ipad3 soon, I guess you will be closing it sooner rather than later?
      - Terrence Chan
        
        In will look for an extreme in the tvix to mark when i sell the aapl puts today more broadly, My trade plan for today is to wait for a bounce to Nas 2935 and then sell short more stocks on a throwback to the downside. Whats your plan today?
      - Nicolai
        
        I have stepped aside for now, because I don’t have much time to watch short-term trades. Just keeping eyes on SLAB,BAS,KEG,BBY (man, that one is resillient) for potential shorts, list and PH,NEWP,WPI on potential long (last 2 to look for a break).
      - Terrence Chan
        
        Sold my AAPL puts at 35.25 at 9:45a. Saw the TVIX make a lower high and AAPL make a higher low.
      - Terrence Chan
        
        I bought some GG Jul $46 Calls @ 3.90.
Terrence Chan

Kind of puzzling to see the $VIX 5.69% today, but VXX down .86% and TVIX (its 2X leveraged ETN) down 1.64%. Shows how this VIX products don’t necessarily capture all of the moves in the VIX all that well since they are based off of 1-2 month futures contracts in the VIX. Hopefully tomorrow TVIX will rectify, and catch up on the gains in the VIX from today.
- Terrence Chan
  
  Today, the VIX ETNs traded in better correlation to the VIX. VIX index VIX index was up 7.35%, TIVX up 8%.
  
  http://finance.yahoo.com/echarts?s=^VIX+Interactive#chart2:symbol=^vix;range=1d;compare=tvix+vxx;indicator=volume+rsi%287%29;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Terrence Chan

Note the comment at this link saying the degradation of vxx shares due to the dropoff in pricing of the vix dec futures contracts. January and feb futures contracts are elevated pointing to the vxx adjusting higher when the dec contracts expire.
http://seekingalpha.com/#article/315408-vix-options-volatility-sonar-wednesday-recap/
Terrence Chan

The VIX has been dropping despite the market continuing to trade lower. Volatility is de-coupled from the SPY market movements right now. I have to think that the lighter trading volumes are the cause. I am considering accumulating more TVIX at these oversold levels
http://www.learningmarkets.com Wade Hansen

Terrance, I’ve been looking at the seasonal depression in volatility, and I’m wondering if you have any opinions/insight as to when you think we may see volatility pick back up. Do you think we’ll need to wait until after Christmas?
- Terrence Chan
  
  Hi Wade – long time no see. Yes, I’ve read a lot about this being a seasonally low period for volatility. I don’t expect volatility to pick back up until after the year is over. That being said, I am very comfortable holding TVIX long until then. The intraday behavior of late has been gaps down followed by gradual melt-ups back to near the previous close. This to me is a sign of a bottoming process.
- Terrence Chan
  
  Here’s another trader’s opinion on volatility. He says there is a volatility skew with January vol oversold and Feb vol premium pricey. He also says that the vix is at a level where it should be catching a bid. All of this further supports staying long tvix. http://www.optionpit.com/blog/spx-iv-and-price-not-matching?utm_source=twitterfeed&utm_medium=twitter
  - Rich H
    
    I bought in @ just under 40 last week, and then stubbornly held this week. As I speak, TVIX is currently 34.20. Strictly your opinion…do you think it’ll make it back to 40 in next few weeks? I need to either buy a bottle of Tums to settle my stomach, or a box of Kleenex to wipe away the tears. haha.
    - Terrence Chan
      
      Hi Rich – the bid has firmed up a little bit this morning. Surges in IV usually happen when the market is taken off guard. They don’t call them market crashes for nothing. I think we will see the VIX attempt to reclaim the 25 level in the short term. Watch that level and time your exit from TVIX if you want to get off the roller coaster. Recommendation: if you are not already doing so, keep your position size low in the future just to make sure you are comfortable with your risk level. I usually only risk 2% of my portfolio value.
    - Terrence Chan
      
      TVIX tanked into the close again today. This trade is not looking good right now, and in hind sight, I should have had a tighter stop. But now down at the levels we are currently sitting, I think there is more upside than downside remaining, with just about a week left in trading for the year. Here are some historical numbers that I thought I’d share based on this 5 year VIX chart:
      
      http://finance.yahoo.com/echarts?s=^VIX+Interactive#chart2:symbol=^vix;range=5y;indicator=volume+rsi%287%29;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
      
      DATE, VIX price level, RSI
      12/10/2007, VIX 18.47, RSI 25.30
      1/22/2008, VIX 29.08, RSI 69.44
      
      12/29/2008, VIX 40, RSI 14.22
      1/20/2009, VIX 47.27, RSI 55.83
      
      12/21/2009, VIX 19.47, RSI 34.21
      1/19/2010, VIX 27.31, RSI 91.33
      
      12/13/2010, VIX 16.11, RSI 23.96
      1/24/2011, VIX 20.04, RSI 68.52
      
      So you can see that over the past 4 years, the VIX has had reached a cyclical low in December, with the RSI reading consistently under 35. Then a few weeks later, in the following January, without fail, the VIX has rallied to close to overbought levels.
      
      As of 12/19,2011, the VIX was at 23.22, and RSI at 22.18… with this in mind, I am holding until I see close to overbought RSI levels in January 2012
      - Terrence Chan
        
        As of 12/27/2011, VIX is at 23.52, RSI 44.94. Still long and strong TVIX
Sandrine Daligault

Hello Terrence,
Got to play TVIX today again with a nice gain. I do not want to hold overnight though.
- Terrence Chan
  
  Yes, I agree that there is some risk in holding positions overnight in this one. The last 2 days of trading have seen some eager sellers at the 44.15 level. I will watch closely tomorrow to see how it reacts there, and it could turn out to be triple top resistance and an area to take profits. What’s your risk/reward ratio when you are day trading this one?
  - Sandrine Daligault
    
    It depends. Tuesday I had not planned it. I have a trading buddy and we chat while we trade. He was mentioning how the VIX was not reflecting the negative day. So I thought, “Maybe the VIX is going to move now.” I could see that volatility was picking up. I was giving it .60 cents on the downside. I got out too early and made $1. There was another $1.50 to be made in the next 10 min though.
    Today my exits were following the ES (S&P futures) during the last 2 hours of trading. There was a range and I took my exit when the ES got to the lows of the day. I am not a day trader but with TVIX it works for a day trade. I do follow the ES and the internals and they tell me when to exit or enter a trade, then I decide if I want to hold on to the trade. Today there was solid support and resistance during the last 2 hours, so I decided to be cautious and exit my shorts.
    - Terrence Chan
      
      Good tip. I also am watching the euro for cues. Will also be looking for weak dollar carry trades like grains for bullish divergences tomorrow.
Sandrine

Your entry price is excellent.
- Terrence Chan
  
  Thanks. It will be interesting to see if 38 holds. I’ve seen a fewer adders say tonight that seasonally the vix finds it’s low in December partly due to the shorter trading month, but also due to the seasonality of strong equity performances in the q4. It will be important to stay disciplined and stick to my plan. Heres more from Barron’s tonight about the vix
  
  VIX Sinks Some More; How Much Does Europe’s Debt Crisis Matter?
  Posted by Murray Coleman
  The CBOE Volatility Index, or VIX, fell today, leaving it slightly above the 25 reading that some analysts believe will signal a settling in market gyrations for awhile — something which would be greatly appreciated by investors playing on the long side of stocks.
  
  The iPath S&P 500 VIX Short-Term ETN (VXX) closed Tuesday down 0.5%. Its net asset value has dropped roughly 12% in the past three months, more than half coming in the past month alone.
  
  The VIX, often referred to as the market’s “fear gauge,” measures the implied volatility of S&P 500 index options.
  
  John Nyaradi, publisher of the Wall Street Sector Selector, notes today at MarketWatch the VIX could be heading to a downside target of around 16,well-below current readings.
  
  “So as we head for the holidays, the headlines scream potential disaster while the VIX remains relatively calm,” he wrote. “The VIX says that things aren’t as bad as they seem and that it could be a cheery holiday season for Europe and global financial markets, after all.”
  
  Bill Luby, the veteran volatility trader who pens the VIX and More blog, describes the seemingly annual VIX swoon as a “calendar reversion.”
  
  From a strictly technical viewpoint, he points out, the biggest change during the December-January season is the most obvious — less trading days. The other is major difference involves seasonality, specifically the tendency for December to be a bullish month for stocks, writes Luby.
  
  In any given year, there’s about a 40% chance that the VIX will make its annual low in December, he adds.
  
  Earlier today, he observed that “in three trading sessions the VIX was already more than 20% off of its 30.91 close” from last Thursday. He added:
  
  “It seems rather far-fetched to think that the VIX will plummet all the way below the current 2011 low reading of 14.27 from April 28th of this year … but stranger things have happened.”
  
  The VelocityShares Daily Inverse VIX Short Term ETN (XIV), which MKM Partners’ derivatives strategist Jim Strugger has suggested might be a broad way to hedge investors’ volatility bets, gained 0.5% on Tuesday. It has risen 3%-plus in the past month. (Strugger, by the way, hasn’t put out an “all-clear” signal yet to start shorting the VIX. He’s waiting for a sustained move below 25 of at least a week to make such a call.)
  
  As Luby puts it:
  
  “Even if you think the European sovereign debt crisis will see several more eruptions before the end of the year, don’t be surprised if the VIX is sleeping with the fishes for the next week or two.”
  - Terrence Chan
    
    What the writer didnt mention was that the vix was down as much as 9 pct today but closed only down .5 pct. Today IMO was a false breakdown signaling a firm support level for the vix.
  - http://www.LearningMarkets.com John Jagerson
    
    Terrence – Like you, I am optimistic that the VIX will go up. BTW that seasonality stuff is just a myth. If you backtest it you will find that the bias emerges because of some statistical clumping in the 90′s. Its a common problem with “commentators” on TV that they repeat that kind of stuff all the time.
    - Terrence Chan
      
      Thanks John. I lightened up on my gold positions this morning, and bought more TVIX. With the Euro screaming lower, I am expecting tremendous demand for puts, which equals higher IV. It’s looking like a feedback loop
Sandrine

Hey Terrence,

I got very lucky with TVIX today and got in at $41.47 at 2:50 pm. That worked out very nicely for me! But boy you need a strong stomach with this baby, and the spreads are crazy, .04 to .09 cents, that is up to $90 on 1,000 shares. Anyway this was a fun trade.
- Terrence Chan
  
  Hi Sandrine – yes the spreads are crazy and move really fast. Just when you think that it’s racing one way it’s retracing a few cents. I was comfortable putting in a limit buy order at 39.45 because it’s bounced off that level a few times at the beginning of the month and the $38 level is the 78% retracement of the uptrend from August low ($15) to Oct high ($111).
Terrence Chan

Yep – this one moves like crazy, but I like the trading environment for it. The market has been in a malaise, and if we have an overhang of negative market sentiment due to the weak Euro (courtesy of the ECB), then I think we will just keep bouncing between sentiment extremes, and we can use Technical analysis to time trades. I may be long today, but give me a few days (or a few hours) and I might be short.
http://www.LearningMarkets.com John Jagerson

I had no idea these exist. Holy cow look at those price swings! I am not sure that I am ready for this meat grinder, but I really want to know how your experience goes with this ETN.
http://www.LearningMarkets.com Dan Olson

Thanks for the post, Terrence. Great to see your trades again. This one looks very interesting.