E VIX Trading: Even The Pros Get It Wrong

It can sometimes be a little confusing to the average investor when the media and financial market communities throw around the phrase “the VIX is dead”.  But when we review the chart of the VIX itself, we come to acknowledge how docile the market and the VIX really are over time.


As depicted in the VIX chart, it becomes quite clear that volatility, measured by the VIX/fear index, can remain quite complacent for extended periods. In fact, volatilities very nature is to remain complacent far longer than expressing outsized volatility.  Regardless of the factual representations offered in the VIX chart, which goes all the way back to 1991 and encompasses major market events, for some reason many traders and investors look to go long volatility in any of its form factors.  The VIX or volatility doesn’t die nor does it have the ability to die, but rather it expresses an ability for a market or markets to mature past the point of greatest fears and from the events that cause fear to have taken place. In other words, the fearfulness surrounding the “what’s the worst case scenario” curtails as the perceived worst-case scenario actually occurs.  The Savings & Loan crisis, Dot Com bubble bursting, 9-11 and the Financial Crisis have all given birth to a more resilient market and more fearless traders/investors. 

It has come to be that even with markets around the globe expressing all-time highs, record sovereign debt levels, political uncertainty and currency “manipulation”, fear or volatility is near record low levels in the United States equity markets.  Really short and really sweet; the VIX is not for those betting against the market, is not a viable hedge against a potential market pullback and is not an instrument for those with long, long-term intentions. Moreover, to succeed with profits by going long volatility with the VIX or any direct VIX-leveraged instrument, the timing must be impeccable and cheaply acquired, which is a rarity in and of itself. Nonetheless, even with the apparent pitfalls and seemingly narrow path to profits from positioning long the VIX, many people do so…even those supposed professional traders and media participants on CNBC’s Fast Money

It was a little over a month ago that the markets were going up against several political and global events. These votes included an Italian Referendum vote, the eventual Inauguration of Donald Trump, U.S. equity indices hitting all-time highs and much more. It was around this time that Fast Money’s Pete Nejarian expressed on air that he had hedged against a market pullback by going long the VIX against his long positions. This wasn’t the first time Mr. Nejarian outlined the strategy and it wasn’t the first time I had followed (not positionally, but in event chronology) his thought to see how the strategy would pan out.  Of the many times the Fast Money contributor outlined this strategy to viewers, Mr. Nejarian lost money on this “hedge”. 

1 2 3 4
View single page >> |

Disclosure: I am short UVXY

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.
Bill Bishop 4 years ago Member's comment

I like your system of shorting $UVXY using layering techniques and routinely taking profits. We just have to keep in mind that it did go up about 1,100% using simulated back-testing late in 2008. If you had relentlessly kept on trying to meet your margin calls, you would be hurt pretty bad. And yeah, the Twitter thing is a lesson to everyone: "Don't tweet strangers unless you are fine with them blocking you."

Seth Golden 4 years ago Author's comment

Thank you for your comment. No it did not go up about "....." any percent. There is no viable back-testing for 2008 or any other event. This is a common misnomer perpetrated through the forbearance of fear. Just as many expected these instruments to perform extremely poorly during the 3% decline on Brexit and the following day's 1.5% decline, that did not come to fruition. The fact is that the first day on how the VIX trades on such a VIX-EVENT will determine how these instruments perform the following day. There is no back testing for the unknown, just simulations from a constant base and the VIX has no constant base.

Chee Hin Teh 4 years ago Member's comment

thanks for sharing