VIX FUTURES: Abusing Volatility 1/2

Who Correlates...?

Executive Summary

• We find alternative financial instruments to generate income in downward trending markets.

• Volatility always reverts to the mean.

• UVXY could make it rain in stormy times like these.

1. Why Do I Care Right Now?

Ever thought about how to make a difference in a market with no clear direction or trend to the downside? Side-way movements can be sustainable if the underlying asset distributes a fair chunk of dividends. Still, a bear market or declining asset prices for a prolonged period is a tough pill to swallow. Modern markets seem highly correlated, especially on the way down, and alternative investment ideas are usually not easy to find.

One could bet on falling asset prices by selling short or using derivatives. However, being short is a dangerous game and only for the most skilled and patient warriors amongst us. Open a 10-year monthly graph of nearly any primary market index or ETF and imagine how successful your shorting would have been. Bear markets generally seem to b…