The collision of global markets and social mood

Tuesday, November 2, 2010

Dealing With The VXX Reverse Split

Unless there is a massive spike in volatility this week, the VXX is due to split 1:4 on November 9th. This would bump the price 4X, and wreak havoc with plans to continue bringing down my average with cheap stock.

Therefore I will need to look for other ways to continue to build a synthetic short position that is not a 1:1 negative correlation to upside action. Since my thesis is that the rally across all asset classes echoes 2005-2007, and that it is due to reckless liquidity provided by aggressive dollar debasement, I want to bet against its continued success. Thus my first choices are YCS, the ProShares UltraShort yen ETF, and UUP, the PowerShares Dollar Bullish ETF.

As I've previously mentioned, these are for explosion positions that are meant to lay dormant. Yes, they decay and carry a loss, but they allow me to sleep at night amid fiscal and monetary insanity. When risk wakes up from its slumber, the April fireworks could prove to have been only a prelude to much more awe-inspiring downside action. Even the VXX went straight up then. No matter how badly it is supposedly constructed, there is nothing to prevent it from doing so again. I notice that none of the so-called options gurus that trash it daily had any inkling that the market was heading for a fall then. A great example of not seeing the forest for the trees.

When high-odds opportunities materialize intraday, I like to add a bit of octane to these explosion positions with high-gamma VIX options and VIX futures as a way of ensuring quick profits and taking risk out of the positions.

Good luck and be ready.

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