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Sunday, June 24, 2012

Probability Now Favors Being Long Volatility

Since the last post, FVE has been rising and as of June 23, 2012 close, FVE's value stood at 21.57.  VIX did fluctuate quite a bit last week, moving from undervalued to fair-valued, back to being undervalued and closed the week at 18.11.

Prior to Greek elections, VIX was overvalued and VIX futures even more so. After the elections, with the outcome pointing to more status quo (Greece staying in the Eurozone for the time being), "fear" has subsided. Yet, "worries and concerns" about the weakening global economy and unresolved problems in Europe remain in the markets.  EU Summit is scheduled for Thursday and Friday of this week and market expectations (and perhaps patience) are high (thin) for the announcement of some concrete plans and actions to tackle all the problems Europe faces.

For S&P500 Index to sustain its short-term rise, some good news would have to come out.  Unless we get good news from Europe or good economic data out of Durable Goods Orders, Jobless Claims, etc., the probable scenario for this week is VIX creeping back up to around the 20 level ahead of the Europe Summit and release of economic reports.  As for VXX, however, the steep contango in VIX futures would continue to put downward pressure on VXX prices.  Net-net, VXX would probably trade between 16-18 level even though a greater rise in percentage terms in VIX is likely.

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