XIV Pricing Model Based On VIX Front Month Futures

I updated the XIV pricing model in order to calculate its price directly based on front month VIX futures.

I explained here how it was done: XIV historical data and pricing model since VIX futures available (2004)

Like that I can directly calculate the XIV price by inputting the VIX futures and do not need to use VXX data in order to do it.

Anyone who has bought the older version of the XIV model can contact me in order to get the new version. You may use my mail which you should already have.

In these times of a possible return to volatility I am increasingly interested in getting into the short volatility trade once again. That’s why I am starting to play with the vix funds pricing models once more.

Very recently I did 2 things:

1) I just slightly increased my VXX shorts.
2) Being bearish on treasuries and profiting from the recent long term US treasuries increase I got once again back into the short treasuries trade :) . The difference now is that instead of using TLT or its derivatives, this time, I shorted a TMF call. TMF is a 3x leveraged long term (20+ years) US treasuries fund. I wrote an in the money call option. Specifically this call: TMF Aug 2014 45.000 call (short).

I like using the TMF fund via a written call because:

1) It’s 3 times leveraged so I can use considerably less money to trade.
2) It’s a written call, so as a derivative, I can use again less money.
3) Commonly with leveraged funds, it has a bad index tracking. That, as well as the fund fee, works in my favour when I short it.
4) It’s a call so I do not have to worry to pay dividends on my short position.
5) As a corollary of 1) and 2) I pay less on short interests. I use little money relative to shorting TLT, the non leveraged version of the same treasuries.

Regarding volatility I like the XIV and SVXY funds (inverse VXX) each time more, specially now that I am getting to understand them better. I have the idea to divide the volatility trade between VXX and XIV/SVXY. I’ll probably divide my short by buying half of the short positions using the latter funds. I might do that only if the volatility increases, in order to decrease the amount at risk. For the time being the volatility of the front month VIX futures is still below the historical average, so I am in no hurry at all. I’m just warming up for the eventual possibility, and patiently waiting, like a hunter after its prey.


About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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4 Responses to XIV Pricing Model Based On VIX Front Month Futures

  1. johnny says:

    thank you for your website. i have been using the free version of historical values to formulate my trading system. i think i am ready to dive in and purchase your model/s. i would like to buy the xiv model. does it have a buy and/or signal? also, you mentioned that there is a discount by buying both xiv and vxx models. i am just wondering what would be the advantage of buying both models. my thinking is, you can estimate the historical value for xiv if you have only vxx model and vise versa?
    again, thank you for your help.

  2. jrv says:

    Hi! Glad to hear that you used the data.
    The XIV spreadsheet comes with a buying signals model. Which is the same as the selling signals model of the vxx.

    The advantage to also buy the vxx model is mostly for vxx traders
    if explains how the vxx is priced based on vix futures.
    If you trade the xiv I do not see a major advantage in having the vxx model unless you plan to compare strategies using both instruments, in which case having both models could be helpful.

    Indeed if you have xiv data you can estimate vxx data and vice versa.

    In case you’re interested I have also pricing models for the TVIX, UVXY and SVXY.


  3. Dmitri says:

    Hi, jrv, thanks for your posts. Do you have VXZ and/or ZIV pricing models? Or at least short description how they are priced… Thanks.

  4. jrv says:

    Hi Dmitri, Thanks. Sorry for the late reply.

    I know how to make pricing models for the VXZ or ZIV but I have not done it because very few people ask for it and I do not trade them and also because I do not have the historical vix futures data for the necessary vix futures months.

    Here is how you do it: For the VXZ model you keep an equal amount of 4th, 5th, 6th and 7th month vix futures and every day you have to sell a fraction of the 4th vix futures and buy the 7th month with the cash proceeds of the sale. Like that you always have an equal amount of those 4 vix futures and you use their prices to price the VXZ. For the ZIV you basically do the same except that you keep short positions and you buy 4th month and sell the 7th.

    I can make the model but I currently have no historical vix futures data for those months but if you do have the data it would be fairly easy to make the model as I explained it above, or I can do it for you if you prefer and would agree to pay for it.


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