Trading the VIX

I entered an ETF position yesterday, sort of on a whim but with some idea of what I was getting into.

VXX is the ipath mid term volatility index ETF. It is a 1:1 rather than a leveraged ETF so tracking should be mostly linear...even though the price is higher than the VIX value. I figured that it is very low now...even though it could go as low as 15 it closed out at 20.1 yesterday. VXX closed out at about $26.80.

Actually, upon closer inspection the relationship is not necessarily linear as it tracks lower at some key points wehre it should not be quite so low. I suppose, like a leveraged ETF it has some medium term tracking problems due to inherent costs and percentage move tracking.

I set a limit order for $27.50 and was obviously filled at that price as it came down. My stop is set at $25 as the lowest it has been was $26.42 when the VIX hit the mid 19's. My current target would be $34 as that is the resistance level so far. If that is broken the next is $41.

This could be a position to hold for the next drop in the market as the correlation is close enough for my shorter timeframes.

The thing about the VIX is that as it approaches zero it tends to slow down as zero is not a value that it could reach, in practise. The lowest it has ever been, since 1992, is 9.31 late in 1993 and under 10 a few times between 2005 and 2007.

Historically it tends to follow trending models and the 200DMA is a nice one for the medium term. The exception was the meltdown in late 2008...which threw most historical models out the window for any style of trend trading.

I am, according to the chart, positioned for a counter trend breakout. Due to the nature of the VIX that is a relatively safe bet at these fairly low numbers.

Jeff.