Fade the Fear and the VIX VXV Volatility
Last week we were presented with a situation whereby the front month VIX was trading at a premium to the 3-month futures contract. This changes the VIX VXV relationship, producing the chart below. Note SPX hit a 50% Fibonacci level at the same time.
Fading the move is the strategy we use when this condition occurs. Trading VIX puts or SPY long works as the condition fades from its extreme over the coming days.
VIX | VXV – Fade the Fear With SPY
Fade the fear is a straightforward strategy.
First, let us look at VIX 5 days ealier, October 11. VIX spikes to 29 (rounded). Compared to February, VIX could have moved higher (hindsight) but, we were gauging our decision based on the VIX VXV chart above which told us VIX was at a premium. Traders were willing to trade VIX at 29 knowing that the 3 month contract was lower. They were affectively taking a loss.
VXV 3-month Volatility Contract
Comparing the two, would you pay more for a commodity or asset today knowing when you took the trade that it was at a premium? You would if you were fearful.
SPY Fade the Fear in Action
We know that fear is fleeting in the market. As we look at the relationship between VIX and VXV we can see this clearly. Taking a long SPY option contract or common shares yielded the results we were looking for.
Traders were willing to pay up (29) last Thursday, October 11 knowing the front month VIX contract would expire tomorrow, while the 3-month was trading at a discount (24).
Here is the post that I shared with Stocktwits and Twitter community on Friday morning. We were already in the trade from Thursday. SPY and NYSE were still fairly bearish on Friday.
Note the gain since the post (+7.20).
In summary, next time VIX VXV yields this condition, take a small long and wait for the fear to dissipate. Fade the Fear!
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