Despite my best efforts to stick to a plan I finally succumbed to the internal pressure of fixing profits. Strong downside movement in Nasdaq on Friday, June 9th and the subsequent inability of the index to push higher during last week, exacerbated my anxiety and pushed me towards closure of the majority of short volatility exposure that I had since spring of 2016.
Part of the decision to fix profits was borne out of dwindling levels of cash due to a significant volume of call options purchased on individual securities over the past four weeks.
I kept a little bit of exposure to SVXY with a 130/155 January call spread but will look to modify it on any significant vol spike if/when it occurs. VIX index closed another week in low 10s, but the 30-day synthetic has stubbornly stayed above 12 as futures traders continue to pay a significant premium to realized vol and VIX index. Nonetheless, M3 has moved below 13, further diminishing potential returns for short vol ETPs. Any spike will have a disproportionate effect on XIV/SVXY and short vol will potentially become attractive (depending on the overall market conditions) only when the entire curve makes at least a 2-3 point shift higher.
For that to occur the market needs a 3-4 week sustained correction with a 5-7% drawdown from all-time highs. Given the current internals and sentiment, the probability of such a correction still remains rather low, however unless such a correction takes place XIV/SVXY will probably just churn in a tight range. Thus, the game-plan is to sit back and enjoy summer. If vol spikes I have significant levels of cash to enter into short puts on SVXY or outright calls/call spreads.
Account performance YTD