Options Trading News

September 2, 2011  Fri 1:08 PM CT

The iPath S&P 500 VIX Short-Term Futures Fund has dropped steadily since its inception, but that might be turning around.

Despite doubling in the last month, it is still down 90 percent from its inception date since being launched in early 2009. This is largely because the fund owns the two front-month futures on the VIX, which until recently were in contango. That means each month it had to roll to a more expensive contract, and was thus continuously selling low and buying higher.

But for the last several weeks the term structure of the VIX futures has inverted to backwardation, as it sometimes does during periods of high volatility. So not only is volatility rising, but the structure of the fund is also helping because it's buying low and selling high.

Anything that doubles in short order is a dangerous short. So as long as the VIX term structure remains in backwardation, it is far better to be long the VXX or at least get out of the way.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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