Three trading weeks have been logged in the New Year and with that… still no signs of increasing volatility to the degree that VIX-leveraged instruments are found appreciating in price. So who’s long volatility? Unfortunately, many make the mistake of going long volatility with the hopes of catching a major VIX-event spike. And these spikes do happen as indicated in the chart of the VIX below:
Do you like carrots? If you go long volatility that’s the foregone conclusion given that these intermittent spikes are nothing more than a carrot luring would-be traders into a long volatility trap. “But if you time it right you can capture a 40, 50, even 100% move in VIX-leveraged ETFs”. If you time it right they say, if you time it right. The problem with this kind of participation is that you’ll never encounter a single trader who has timed it right, meaning got in at the very beginning of a VIX-event and got out at the very top of the VIX-event be it a 40, 50, or even 100% move. It’s the timing that’s the problem, but most traders can’t focus on the timing issue given what is presented in the chart shown. That carrot is a strong lure, especially when surrounded with other biased perspectives one chooses to incorporate into their desired outcome. An example of this carrot/bias combination is perfectly outlined in an article found on Seeking Alpha titled Is The VIX Finally Ready To Climb?
Within that article, the author erroneously violates most every key principle regarding volatility market participation. Most obviously, the long volatility position is one with intrinsic risk that the author has taken and puts forth as a viable investment thesis to capture capital returns. Along the lines of seeking out a VIX-event, the author denotes his bias with three main catalysts and one minor catalyst noted below.
Moreover, and most unfortunately, the author has chosen to go long VIX-leveraged ETFs during a period of outsized contango whereby the likely share price appreciation for these instruments is abnormally low. But nowhere in the article is that discussed, considered or seemingly contemplated. Having said that, the anonymous author does not make readers aware of this additional risk to a long volatility position.
