Tag Archives: seeking

The Cash Is King Playbook

We’re seeing something really unusual in the financial markets this year. As I’ve noted recently , there’s almost nothing that’s working this year. No matter where you’ve diversified your savings you’ve likely lost money with the exception of cash. If we look at the two primary asset classes, stocks and bonds, cash has only outperformed both in the same year 10 times in the last 90 years. So this is a pretty unusual event. But there’s some potential good news on the horizon. When this occurs both stocks and bonds tend to bounce back very strong. In the 10 times this has occurred in the last 90 years stocks have followed up with average 1, 2, and 3 year returns of 14.34%, 18.76% and 16.72%. Bonds have done a bit worse with a 1, 2 and 3 year average return of 10.24%, 7.7% and 6.17%. A balanced portfolio has also generated abnormally high returns with a 1, 2 and 3 year average return of 12.29%, 13.23% and 11.44%. As is often the case with diversification, it’s not timing the market that counts. It’s time in the market. So, while cash looks particularly smart today the historical figures say that cash won’t be king for long. Share this article with a colleague

Finding The Right Volatility ETF

Summary Volatility products can provide market leading returns. Proper education and knowledge of the VIX futures market is needed to be highly successful. Risk factors should be accounted for when creating and implementing your strategy. Welcome to the Seeking Alpha ETF Guide. This article will focus on how a VIX ETF could play an active role in your portfolio. When looking for a VIX ETF you have several different options between short-term and mid-term futures products. This article will cover only the most active funds. For more options visit the Seeking Alpha ETF Hub for a list of all volatility funds. Both types of products (short and mid-term) focus on the VIX Futures which trade independent of the market and the popular and well publicized VIX Index. Short-Term There are two types of short-term volatility products. To determine which type of product is for you, you first need to determine whether you are betting on an increase or decrease in volatility. Long volatility products, such as iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) and ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ) which offers two times the leverage, benefit from increasing volatility. During periods of low or decreasing volatility, inverse products such as VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV ) and ProShares Short VIX Short-Term Futures (NYSEARCA: SVXY ), produce better results. All short-term VIX products focus on the front and second month’s contract in the VIX Futures. Mid-Term You also have long and inverse options available in mid-term futures products. For rising mid-term futures you have VelocityShares Daily Inverse VIX MT ETN (NASDAQ: ZIV ) and for decreasing mid-term futures there is VelocityShares Daily Inverse VIX MT ETN . All mid-term VIX products focus on the seventh through fourth month’s contracts in the VIX futures. Mid-term futures products are not as popular as the short-term products. Education Investors looking to use VIX products in their portfolios should have a very high level of education into the inner workings of the VIX Futures market. Seeking Alpha is a great resource for many articles that focus on the how and why rather than the right now. I have written many articles that are specifically geared towards investor education and are meant to serve as training tools for years to come. Since the vast majority of these products have been around less than a decade, back testing is often used to demonstrate the effectiveness of different strategies. Investors should also note there are distinct differences between short-term and mid-term volatility products. A personal pet peeve for me is when I see comments such as “this thing is rigged.” That is a good example of someone who hasn’t educated themselves on volatility and is now mad about their poor decision. Many misconceptions exist in regards to VIX Futures products. A thorough understanding of how these products are structured can prevent expensive mistakes. Trades based on hopes and dreams or borrowed money are a recipe for disaster. A proper education is the only way to prevent failure when trading volatility. Contango/Backwardation A key indicator when determining longer-term directions of volatility products are contango and backwardation. Contango will benefit inverse volatility products, like XIV, while backwardation will benefit long volatility products, such as VXX. For more information on this key metric I recommend this short video . Trading Objectives Long volatility products – Many investors use long volatility products as insurance for their primary portfolio. It is difficult to time spikes in the VIX and these products lose value over time. They are not meant to be buy and hold investments. From historical data, the longest these products have gone without losing value is less than one year. Inverse volatility products – During flat and rising markets, these products can often beat the major benchmark indices. Although I don’t advocate a long-term buy and hold strategy with any volatility products, short-term inverse funds have provided the best returns when held for periods of 2-6 months. Risks This would be the most important section of this article. I have spent countless hours promoting the education and risk factors of investing in various VIX funds. Although these products can provide returns several times greater than the market, they also come with many risks that are hidden to novice investors. I have seen many beginners with high hopes of getting rich quick. They may win the first or second hand but eventually lose all or a very significant amount of their capital by not properly assessing risks before making trades. If you do not fully understand how these products work or do not have a thorough idea of the risks of investing in volatility, my recommendation would be to avoid them while you become more comfortable and complete additional research. Practice accounts and small trades are a great way to build real knowledge on the effectiveness of your strategy. Rising markets make inverse products seem like the perfect investments. However, these products can easily lose 50-80% of their value during periods of economic turmoil. Black swan events are rare but would significantly effect volatility products. Historical examples of these events would include acts of war, terrorism, and other unforeseen events that would have profound impacts on the market. Returns VIX funds have provided some of the best returns over short to medium time frames. Take a look below at some of the best results for inverse and long volatility products: Chart created by Nathan Buehler using backtesting data from The Intelligent Investor Blog . Conclusion The best advice I can give if you are thinking about trading volatility is to learn as much as you can about how these products operate. Test your strategies, document results, confirm successes, and evaluate failures. You should feel very comfortable with using these products before making your first large trade. Seeking Alpha is a great resource to use. By interacting with contributors and other users, you can create your own virtual professional learning community. I hope you have found this introduction to volatility funds useful. Now it is time to start researching and comparing individual funds. Thank you for using the SeekingAlpha ETF Guide!

How I’ll Use What I Learned From My Premature Buy Of SVXY

Summary August 25 — a special day. On Seeking Alpha I urged being long SVXY and CBOE first publicly exposed its 9-day time horizon Volatility Index, accompanying the 30-day index. Market-makers and prop traders use VIX-based securities in their hedging. The longer the time to expiration of the contracts involved, the larger the uncertainty, the higher the cost. CBOE insiders had watched VXST, the new index, behavior privately for months before its release. Its shorter time horizon can advantage arbitrages and reduce capital haircuts. It’s embrace by other investment professionals and by the public was anticipated, but not certain. It turned out to have a dramatic effect on the established, longer-time index. On October 8th trading will begin in options on the VXST, further elaborating the shorter-term VIX-index securities inter-relationships web. Then we will have better expectations information. Meanwhile, tail wagging the dog? The CBOE has had since August 25 to see how options on the VXST should behave. No doubt they are conducting internal training sessions to encourage rational member trading activities. I have to believe they also learned from market reactions since August 25. Figure 1 shows how hedger expectations for the longer-term VIX index changed at that point. Figure 1 (used with permission) The VIX index is, excuse the expression, volatile. The forecast ranges for the index in Figure 1 are derived in the same way as our market-maker forecast reports on stocks and ETFs. The only difference is that the hedging in index derivatives is done in markets not easily accessible by individual investors, at a scale not inviting to personal portfolios. It should be evident that prior to late August this year the 30-day volatility index had a fairly reliable bottom around 12, with upper expectations reaching into the area of 20. Oscillations in that range provided upside excursions of as much as 75% {(20-12) / 12} and might occur in a week or two. Playing that game adroitly (flawlessly) for a year or two could earn a comfortable retirement for generations of the family. But since August 25, there’s a new sheriff in Dodge. Whether he has brought more or less law to town is not yet evident. Madam CBOE’s establishment appears to have taken on a new vibrancy in the company of VXST. What it has meant for the ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY ) is alluded to in Figure 2. Figure 2 (click to enlarge) My guess is that there’ll be lots of moderately-restrained fun and adventure in town until the court comes to session, starting on October 8th. Then we’ll see what his honor Mr. Market has to say in judgment. Conclusion Stay tuned for intra-day thrills and spills while those with short-time horizons have their fun, adventures, greed and fear. Meanwhile, those with longer visions (out to the next calendar quarter at least) think there’s already lots more upside than downside among portfolio investment candidates. Check out yesterday’s market profile in Figure 3. Figure 3 (provided with permission) Pictured here are over 2500 stocks and ETFs’ price range forecast balances between upside and downside prospects. Normally the distribution would be centered around a Range Index of 40 instead of 21 (40% of the range to the downside, 60% up) with no or few screaming bargains on the left. Market outlook implication: fear has taken over, but may be fatiguing for lack of downside opportunity. If so, SVXY could again be attractive – but we’ll wait for October to decide. Share this article with a colleague