Look at history. At no time did volatility spike when its at 12.
So I guess the question for VXX longs would be - does that environment actually make it more likely to profit - an environment with a low VIX, low front month futures, and low expectations for future volatility. Eventually, you'll get a spike (probably quarterly or so) of 25% - would it actually be a better situation because you can cheaply wait, take the profit, then wait for a reentry?
Having wrote what I just wrote I expect a 5-7% market correction and a spike in the front month contract back to 16 is imminent, maybe starting Monday. I have never before seen the market index skews this low when the VIX was also like this. 20% IMHO that this week will usher in a correction of 15% or more. Have no idea what the catalyst would be and must admit that with the Fed dumping a $1trillion in hot money into the now bullish money center banks all bets are off.
I think you all have valid points that something seems amiss - that the normal reaction from what we've witnessed this week in every past situation would lead to the logical conclusion of at least a short-term correction. Throw in a bit of political risk and it seems obvious BUT ...
For the reason I thankfully did not sell any 23 Feb VXX puts (which I think may have gone over 80c today and would have been quick 50% loss) I think we all struggle with the catalyst for such a move. I couldn't find anything that hadn't already been presented to this market in the past two weeks.
I'm far from plugged into the "scene" but I suspect that the money that is supposedly on the sidelines is looking for a way to get in. Since this market won't drop like they want/need it to, it eventually gets pressed into action anytime we're down even the slightest bit. Rick - it's not just USD 1 trillion, but also a ton of EUR, JPY, GBP, etc. Probably everything but CHF. There is absolutely no reason for EUR/JPY to move over 1500 pips that quickly, but it did. That's my personal risk on/risk off currency cross. While a good chunk of that move was the JPY side, EUR hasn't looked too bad, either. Oil, which had been kept below 92 for a while, peaked above 96 Thursday. Some of that is political, but it also followed the currency this time.
While poor earnings could/should be a catalyst, the storm in late October and the "fiscal cliff" makes everything bad ignored for this quarter. Even next quarter we've already given a lot of retailers an excuse with the payroll tax increase (or undecrease.)
Yes, retailers probably had a bad quarter - but what if America just quit buying foreign-made stuff we don't really need? Would it have that much of an impact on GDP? We seem to be buying a lot more domestically made items (cars, houses, airplanes) recently.
Just some random thoughts - probably not correct, maybe not even close, but hey, this is a discussion forum anyway ...
I have two systems for VXX shorting. The main system is just go short whenever the spot vix 17 day is below the 60 day. Won't be getting many short signals there going forward.
I have a subsystem, though, that creates an index weighted 60% to the front month contract as compared to the historical average of 19 and 40% weighted to (second month minus spot)/spot. That signal issued a MAJOR short signal after the roll earlier this week but after today is back closer to average.
I'm going to continue using these systems. If we are now in 2004-07, then we will see periodic spikes in spot of 30% and front month of 20-30%. Those will be shorting opportunities. We may also see selective shorting opportunities after the futures contracts roll. But the days of easy money are over, my friend.
Rick you want to know pain? Friend of mine went in heavy on puts expiring today. He chickened out and sold when VXX went from 28 to 32. Thought he was being smart when VXX hit 36 or whatever. Those puts would have been a 1000% gain from where he sold. 1000%! In less than a month!!!! This is madness.
I don't think the easy money is over though. I now believe the VIX will further decline until it touches 4 or 5 some time this year. I'm not kidding- looking for an additional 60% drop in the spot from here. None of it matters anymore. Earnings, the economy, politics. Nada.