Ahoy hoy!

So my first blog post (ver. 1.1.) On Monday, which seems like a month ago, I sent my first trade idea on stocktwits. It was a call spread in VXX  selling 1 Oct 44c buying 2 Oct 54c for a .75 credit. I then planned to do a follow up blog post explaining it in more depth. Monday night I sat down to figure out this whole blogging thing and quickly got pulled in 17 directions. I decided I needed a clever first post, it can't just be a boring explanation of a trade. I wanted something with pictures, a funny story, a little bit about me, my background in trading, why I was starting a blog, etc. That post was gonna be the bomb, you'd laugh, you'd cry, you'd learn how to make a million dollars no matter what the Fed did Wednesday and stocktwits would invent an award for the sole purpose of giving it to me... As fate would have it my 3 month old had different ideas for how I'd spend my evening. The market and Olympia had designs on the rest of my week.

I drink it instead of bottled water, more cost effective!

Perhaps that introductory blog post will come this weekend, but for now, let's focus on a profitable trade idea, since that's why you are here. This trade is a new way to try to play the eventual decline in volatility while limiting exposure to the even more inevitable puking out along the way when Greece hires Leo Apotheker to manage their GLD shorts.

 So here goes.

Sell 1 VXX OCT 40p
Buy 2 VIX OCT 29p

As I write the trade can be put on for somewhere between a nickle debit and nickle credit depending on how good you are at working the order. I just paid $.03.

BUT why would one ever want to bet against volatility? We're in a global bear market, the European Union is falling apart, and Netflix is under 130! I grant you all of those points, and I too can't find reason to be optimistic today, which is why I'm looking to make a low risk high reward bet on exactly that happening. Volatility is mean reverting, eventually elevated levels in the VIX tend to get smashed back down to earth, not only does it happen when you least expect but it happens faster than one expects. Consider spring of 2009 when the VIX May futures closed at 38.75 (the current October VIX future price as of writing this) on April 27th, then fell 30% by May settlement to 27.04, the VXX fell 21%) Now I grant you that is a cherry picked date to show where the VIX went from levels we're seeing to levels where this trade would pay off. I cannot say that we will have a similar experience this month, but eventually the vix will go back under 30, and I want to get paid when it happens.

BUT what about VXX? That thing is a dog... True in most cases VXX is a dog, if you haven't read all about the roll issues I recommend checking out Bill Luby's VIX and more blog, he really does tremendous work. However, right now the VXX is befuddling everyone who's tried to short it the last two months (myself included) with it's relative out performance due to the backwardation in the VIX futures structure. It's now experiencing a positive roll yield which will cause it to hold up better in the immediate future. Eventually the futures will revert to contango, but by my estimations that will be somewhere in the low 30s on the VIX and low to mid 40s on the VXX. Consider we briefly slipped into backwardation last Friday with the VIX SEP future at 30.98 and VXX at 41.55, since then the backwardation returned to help the VXX make higher relative highs and the VIX lower relative highs.

For the sake of getting this post up I'm going to end here. There's a lot more I'd like to say, and yet at the same time I've said probably too much. Hey it's my first post, hopefully I'll get better, and you'll keep coming back. But ultimately that will be decided by the quality of my content. So think about the concept, I think it's a good one here. And please feel free to leave any questions or comments, one of the main reasons I started this blog was to generate discussions that will help me and you make smarter decisions in a tough market.

Thanks,
Dan
(full disclosure, I made this trade, along with the other one I mentioned.)