Subscription Form

Your subscription could not be saved. Please try again.
Your subscription has been successful.

Stock vs. Volatility: Possible Reverse

The picture below is a portfolio constructed from 3 ETFs: SPY for stocks and VXX, VXZ for volatility. Each part of the portfolio is volatility-normalized (one-month daily price change st-dev).

Since January, volatility fell despite stocks were locked at the same level. What I see now is a good chance that next couple of month we'll see a reverse dynamics of this stock vs. volatility pair. Either volatility will surge ahead of falling stocks - see November-January as an example - or the market will go up with volatility being pretty high with flat term structure. I know the last option sounds strange, but you'll never know.

In any case, now is a good time to use volatility products for hedging against the stock market downside. Chances are good this time you'll not be punished for doing so by the evil VIX contango.

No comments:

Post a Comment