- Looking for highly asymmetrical trades
- Determining entry points for them
The iPath® S&P 500 VIX Short-Term Futures™ ETN is designed to provide investors with exposure to the S&P 500 VIX Short-Term Futures™ Index Total Return.
The S&P 500 VIX Short-Term Futures™ Index Total Return (the "Index") is designed to provide access to equity market volatility through CBOE Volatility Index® futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500® at various points along the volatility forward curve.
Let me decode that important sounding financial bull$hit for you. This "fund" is nothing more than an ETF which synthesizes the performance of options on the VIX. The VIX, in turn, is a measure of so called "implied volatility". In other words, the VIX measures the trading action on the options markets. Options are, in theory, supposed to be used for hedging either long or short bets on the market. The theory is that you buy options as an insurance policy against unexpected volatility that attacks your current trading book. If the trade of your main position goes against you, your options (which are an asymmetric bet) will pay off just like insurance does if you get in a car wreck. Of course, this is the 500,000 foot view as options are one of the most complex and least commonly understood aspects of "investing" (aka gambling). People write whole books on options and how to evaluate them. All you have to know is that you are placing a long shot bet on the ponies when using options. Your odds are 50 or 100 to 1 against you. So if you win, you win big. That means you don't bet much at any one time because the odds of losing it are high.
The value of options decay with time. You hold options for a limited time. During this time if the event that you are insuring against occurs, they pay off handsomely. In one one of the biggest documented options wins of my life, I told all of my friends that AIG was a fraudulent scam when it was still trading at over $30 per share (pre government takeover). I bought $5 put options as far out as I could (known as leaps) for something like 14-25 cents each. When AIG crashed to below $5 I sold them for 66x (6600%) of my purchase price to the panicking party who had foolishly sold them to me several months before. This is the kind of "handsome" rewards one can reap from perfectly timed options purchased. At the same time, most options expire worthless and you lose 100% of your bet.
Despite any weasel words that can be wrapped around it by traders (i.e. "insurance"), options are gambling and anything that has to do with them is gambling. Period. But so is Vegas and people do it all the time for fun so let me see if I can have some fun with VXX. And so I offer the following chart of VXX (scroll down).
Don't be too put off by the drop from $7500 to current value of $48. That simply shows that the value of options evaporates over time. I will not be buying these at $7500 so I don't care that someone else once did. To be fair, I'm sure the price didn't start off at $7500 when they began this gambling facility. As the price fell they would just do what is effectively a reverse split in order to keep readjusting the price higher. When you do that it changes all the prices upwards going all the way back to the start of the fund. It's an accounting trick more than anything. But there is something important to know from this: the price will NEVER get to 7500 again. Not even close.
This chart clearly shows that starting in 2009 when the federal reserve effectively took over control of the US financial markets that implied volatility, that is, fear of a market crash, has been kept down. This is the so called Bernanke put. It refers to the belief that Bernanke has the will and the wherewithal to drive permanent plateaus of personal prosperity in perpetuity. Of course, he does not even if many think right now that "hero" Ben really can do that.
I think the wave count so far is very clear, very obvious: 5 distinct waves are shown and we are clearly working on the 5th wave. The line black 1-3 is parallel to black 2-4. At some point, Bernanke will lose control of his ability to manipulate stock markets. If you have been paying attention, that ability is closely tied to interest rates. When Bernanke loses control of the treasury bond market, and he likely will sometime in the next 12 months, all Hell is going to break loose.
This Hell will have two major components: rising interest rates and falling confidence in the fed. The time to be in VXX with just a small amount of cash - say 1000 bucks - is when the 5th of 5 in the chart below has completed. At that point, there will be a very, very high chance that a direction change will occur in the VIX and thus in the VXX ETF.
One of the beautiful things about Elliott waves is that they predict price levels by chart patterns. After 5 waves occur in one direction, the EW principle states that you will see A-B-C retracement that takes you back up to the prior 4th wave. The chart below tells us that that level was $900. So, from wherever the VXX finally bottoms, the gambler can with some confidence expect a run back up to $900 per share and in very short order as shown by the red lines. In order for this chart to move back up that high, it must occur very quickly because otherwise the time value of options is decaying very quickly. This chart will move very quickly upwards when the major indices begin to realize that Ben Bernanke and the federal reserve are a bunch of con men and not visionary financial "heroes" as some in the liberal media have been led to believe.
OK, so just how close is "very close to completing the 5th wave" in this chart? Here is more detail:
Below is just the 5th wave in even more detail. Look at that dramatic 75% gap down!! Talk about massive overconfidence! It's like they stopped buying options completely in the hopes that Bernanke would not allow markets to go down ever again. Talk about being ripe for a slaughter... that HAD to be a 3rd wave. Pay very close attention to the alternation that occurred. 1-3 is a line that is parallel to 2-4. That plunge had to occur in order to make that come true. Coincidence or evidence of the invisible hand?
It is of interest to note that the massive 75% drop into the 3rd wave was a real market activity (people sold the VXX) but the move back up was totally artificial. On Nov 8 they did a preplanned 1-4 reverse split for reasons I mentioned before. This is why the shares went from $12 up to 48, not because the market suddenly got fearful. But someone wanted to see a proper 3rd wave form in the chart and thus just a few days before the split they ran the price down massively - effectively bashing the crap out of anyone who was using this mechanism to bet against the market.
Just before the plunge it was orange 2. Then the plunge occurred into orange 3. Note that this took place during a 3rd of a 3rd on a highly, highly leveraged gambling vehicle. There is no other way that kind of move happens in the markets. After the plunge it did not form an immediate vee bottom and then come screaming up because the wave count would have been left hanging at a 3rd wave of the wrong degree (orange instead of red). VXX remained a full four trading sessions down in the $12 range as 5 more green waves down completed orange 5 and thus red 3. When 5 final green waves down finished green 5, orange 5 and red 3, the shares skyrocketed (as a result of the reverse split) into what I believe will turn out to be red 4. If my count is right, the next move should be a dip into a 5th wave and IMO it will be a failed 5th.
Conclusion: I think we have seen the depths of the lows on VXX for now during that massive 3rd wave punishment of anyone using it for "insurance" (AKA making leveraged bets against the markets). That is the kind of thing that you do to people who won't toe the party line. I'm quite sure that the agents for the fed do this sort of thing all the time in order to try to teach the herd a lesson.
In forming the 5th and final wave down, I think we will see a pull back from that massive (if not artificial) 4th wave up. I suspect that the next wave will consist of 5 sub waves down and will mark the end of the bear market in fear. In other words, this model is telling me that people are going to start buying stock insurance again, and probably in a very big way. It suggests that something is going to happen to make the herd fear a stock market collapse. Could Bernanke be planning a stealth tapering so that he gets at least one of them in before handing the reins over to Yellen? Could the government be planning another false flag operation? I don't know what the catalyst will be but the collective wisdom of the herd is given by these charts. It does not pay to ignore the herd IMO.
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