Friday, July 8, 2016

XIV Part 3

[NOTE: THIS IS NOT INVESTMENT ADVICE AND SHOULD NOT BE RELIED ON IN ANY WAY. IT SIMPLY RELAYING SOME CAUTIONARY COMMENTARY ON ROLL RISK AND CONTANGO]

The day after the Brexit vote XIV dropped to below 22.50 and a business day later dropped below 20.50. Today, XIV opened at 27.49 and closed above 28.00. This has created some greater enthusiasm for XIV. At the same, time, while everyone understands the risk that one might buy XIV at a given price and it drops from there and never gets back to that price, everyone might not understand the risk of roll cost.

One needs to watch the “roll” percentages should the vixy futures have a higher price on the short months vs the longer months. You can monitor this at the Vix Central website. Currently the contango is 13.4% for the first month, however after periods of extreme volatility when you enter this it usually is negative.  If it stays negative for a longer period you’ll be able to monitor how much you would be losing each month by staying in the position. Thus, "buying and holding" XIV as a permanent hedge can be unwise.  Thus, while the strategy of purchasing after periods of extreme volatility seems to work for now, VIX futures need to be monitored. And to put a fine point on it, the roll risk and contango are what make buying the mirror image of the XIV, namely the VIXY or VXX which move in the opposite direction of XIV, a very risky investment and one that is suitable only for highly speculative professionals making very short-term bets.




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