Riding the Curve

CBOE website has a nice little tool to generate the VIX term structure at various times and dates. This is the term structure from Monday & today. What a difference a few days makes> Keep in mind the news of the Tsunami hit last Friday.

It is my personal opinion, and somewhat backed up by the statistics, that the optimists always triumph in markets and that this is an excellent fade.  The headlines screaming panic and the constant chatter from various agencies who may or may not know anything will ultimately turn out to be nothing but noise. Timing is always tricky though, I guess nothing in markets is that easy.

Calendar spreads or my recent preferred structure the VXX VXZ pair trade are appropriate however in any spread one needs to consider how to hedge it to avoid catastrophic loss. One can purchase OTM index puts, no sense in buying the straddle or strangle. Or perhaps options on some of the weaker constituents? Or the simpler thing might be to play it small, manage positions, and/or strike when there is confirmation of some resolution.

EDIT 3/20/11

The VIX term structure has come in nicely and it’s likely we won’t hear about Japan or nuclear holocaust ever again. There’s just too many Justin Bieber headlines we’ve been ignoring in the meantime.

Interestingly my idea of VXX/VXZ pair trade has not worked out just yet. I still expect the trade to revert so perhaps there’s still an opportunity here.

~ by largecaptrader on March 16, 2011.

2 Responses to “Riding the Curve”

  1. VXX-VXZ is indeed a very nice pair. Personally I think it is the lowest hanging fruit out there. Just as you’ve mentioned, risk management is crucial for this one.

  2. F*ckin’ tremendous things here. I’m very satisfied to peer your article. Thanks so much and i’m looking ahead to touch you. Will you kindly drop me a e-mail?

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