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.