Volatility!!!

August 8, 2011 9:07 AM


I’ll be quick as there’s a lot of stuff to follow today.

As long time readers know, I have a short position in Barclays Bank PLC iPath S&P 500 VIX Short-Term Index Futures ETN (VXX: AMEX). It is a product structurally designed to decay to zero. The problem with being short VXX is that from time to time, it spikes substantially. When that happens, even a small position suddenly becomes large—sometimes a bit too large. I have huge gains in this position and want to add to it on volatility spikes, but I don’t like the chance that volatility can theoretically go to infinite in the short term. Short positions HAVE to be small—especially when you’re short volatility in a world where multiple large countries are insolvent.

ipath

This is where Barclays Bank PLC iPath Inverse S&P 500 VIX Short-Term Futures ETN (IVO: AMEX) comes into play. This is a product that moves opposite to the S&P 500 VIX Short-Term Futures Index. If the VIX declines, this should rise in value. What I like most about this product is that my losses are capped at 100%. They are not infinite like with VXX.

In the last month, IVO has declined from 28 to around 19.80 where it is trading pre-market. This morning I initiated a position and will mark the starting price as 19.80.

Remember, volatility is a funny beast. I always play this game small.

Categories: Current Investments
Positions Mentioned: IVO
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