VIX FUTURES: MacroDoζer Summer Special 5/5
A Summer Special Without a Volatility Play Would Be Like a World Economic Forum Without Biodiversity Loss
“Your income can only grow to the extent that you do.” UVXY Volatility.1
Did we save the best for last, with more volatility to come?
A technical retrace is due, more likely than the existence of witchcraft.
We stick to the ETF; the default risk of ETNs is too real for us.
Facing contango drag while shorting put credit spreads: living life to the fullest.
1. Why Do I Care Right Now?
What would a MacroDoζer Summer Special be without a VIX or UVXY volatility play? Nothing. It would be like a year without new variants, a day without energy and food concerns, or a future without threats from Russia, China, or North Korea.
If I were one of the global citizens of the World Economic Forum (WEF), I would phrase it differently: It would be like a decade without biodiversity loss, extreme weather, or climate action failure. Hypocrites and their priorities. I dedicate this BrainDoζer to Bjorn Lomborg, a functioning, rational, and well-balanced mind.
Back to the markets. This is our last Summer Special, five out of five, separation anxieties: ON. It is what it is. We saved the best for last. I am not going to lie, this one feels most uncomfortable. But that’s why it will probably work out best.
If our biggest risks over the next ten years were biodiversity loss & co, as suggested by the WEF, I would say we do not bother about volatility bouncing or markets crashing ever again. If you think we might be forced to tackle more urgent and expensive global risks, follow me on this one.
I am feeling a little bouncy today, so let’s pull the trigger on a UVXY volatility spike over the next two months. Unless you think S&P 500 volatility should decline until September and markets have turned for good. That’s what my grandmother would have told me before bedtime. So little she knew about sweets and Gameboy under the pillow...
Today’s global distractions, neither sweet nor playful, must be priced in since mid-June; at least there was no one left to sell on any news. However, that doesn’t mean problems have disappeared. We might not have seen the actual (dance) floor yet. Global imbalances, in combination with no Fed to the rescue, equals volatility in my algebra booklet.
We should also be due for a technical retrace over the next few weeks. Additional bad news about the global economy and its tensions will come in handy when it happens. Watch out for it.
Rant Around Technical Analysis
Some people think drawing lines and wave patterns onto price graphs is wizardry. Instead, I use it to determine and analyze historical price levels and price behavior. Charts show me exactly how the aggregate of buyers and sellers interacted and how they eventually settled on a no-BS concrete price for a concrete product.
I always imagine a real-life market, Arabic souqs, or those romantic early-morning London commodity and furniture fares. Thousands of market participants, fluid pricing, and lots of liquidity. Traders run around from one stand to the next, trying to get good deals early on or later that day. Information is flowing, prices are swinging, masses are moving, and human spirits are running hot.
Back at home, analyzing the market experience, some participants will understand they bought cheap, and others will realize they overpaid. But thank god the market opens again next week, and people will trade, and their past price agreements will influence present and future price developments. If you have a good understanding of price behavior and market psychology, you might be able to put probabilities onto future outcomes.
That’s why I utilize historical prices; it is one tool amongst many. Use it to your advantage. Do not dismiss it as witchcraft. Real buyers were acquiring real products from real sellers for a real price. It will influence future price behavior. Why?
Because we are human.
2. Useful Background Information
If you are a MacroDoζer veteran, you should be a volatility pro by now. If not, check out and scroll through our latest BrainDoζer on everything and more related to volatility.
We looked at the UVXY ETF (Exchange Traded Fund) and the VXX ETN (Exchange Traded Note). ETFs and ETNs both track an underlying index of securities. On the outside, they seem very similar; they are both exchange-traded products. Generally speaking, an ETF faces some tracking error risk and no credit risk; the fund invests directly in the underlying assets. ETNs are not supposed to have tracking error risks, the issuer makes sure to mirror an index perfectly, usually for a juicy fee, but there is a credit or counterparty risk. You invest in a structured product, sold as a debt note issued by a counterparty, the issuer (e.g., Barclays for VXX), which could go out of business or default on that non-secured debt vehicle. Credit Suisse knows how that works best. Barclays could be second in class sooner or later.
I am trying to make a quick point. In theory, no tracking error; in praxis, VXX ETN has been trading with a hefty premium to its underlying VIX futures since mid-March due to restrictions on issuance and potential de-risking endeavors. A complex story, no need to go deeper. The point is that VXX is currently trading freely. It could either short squeeze to the moon or crash like a wet pet to its net asset value (if Barclays reengages in price control) or go to zero if the bank defaults on the product.
UVXY it is, for us. If you feel like gambling, VXX out-of-the-money put or call debit spreads seem a fun way to play it. Alternatively, Las Vegas.
3. Trade Execution
We are selling a put credit spread, short put 9, long put 7, maturity Oct 21, 2022. We have more than two months for a volatility spike to work out. As long as the price stays above 8, we are ok. Remember, the price will experience additional drag due to daily future rolling activity. This is already priced into the options and reflected accordingly.
Break-even is at 8.
Trade Entry - Aug 5, 2022
1) Short Put 9, Oct 21, 2022: 1.59 Credit.
2) Long Put 7, Oct 21, 2022: 0.46 Debit.
Total: 1.15 Credit.2
4. Final Comments
Expect updates on BrainDoζers within 4-6 weeks. We use the exact heading, ending with (+/- xy%), and label the cover cartoon with a red Doζed stamp. That way, the performance will be easy to follow.
We are not sending BrainDoζer updates via email unless you specifically ask for it here. We want to keep the information flow light and to the point. You can still freely access all updates on MacroDozer the moment they are released.
My name is Juri von Randow. You can find me on the top banner to the right. MacroDoζing, as if there was no tomorrow. (Email version only.)
Feel free to share. Sincerely.
Original quote by T. Harv Ecker, then repeated by UVXY volatility.
Total credit equals the sum of the mid-prices of each bid/ ask spread. Brokers usually get filled mid-price for liquid options.