Shorting the VIX with ZIV -
Analysis -
During the two year period of 2016 and 2017 when stocks were going up steadily, the VIX gradually zig-zagged down from its 2015 peak and then spent much of 2017 under 10, which is very low for the VIX. Meanwhile ZIV had a beautiful steady climb during that full 2016 and 2017 period, almost tripling. So that part is good - ZIV reliably did what it was supposed to, and it would have been safe to own ZIV through that entire 2 year period.
In a previous post I compared the current VIX level to its level in late 2008, and noted that VIX had only gotten this high (75) twice (now and in late 2008), and that the previous highs were 55. At first glance, seeing that parallel would seem to support the idea that VIX is way overextended and not likely to go up much higher.
However, one thing to be concerned about is the fact that in 2008, the stock market worked its way lower thru Q1 and Q2, and didn't actually go into free fall until Q3 and Q4, which is when VIX really took off. The VIX reached 90, and the move started around 20 in September when the Lehman failure occurred. So 20 to 90 in approx 3 months. But earlier there was a big lead up time of 21 months (early 2007 to Sept 2008) where the VIX rose from 10 to 20.
But this time is very different, with the stock market free fall occurring after only 3 months of 'lead' time, instead of 21 months. The VIX went from 12 to 17, and then pow, very quickly up to the current 80 area.
The upshot of this analysis is that it's very possible the VIX might continue zooming up to 150 or even 200 before this is all over. We're in uncharted waters, and I'd be careful about committing too much to the ZIV trade too soon.
ZIV's moves in 2016 and 2017 indicate that it can be a reliable longer term holding, so that's good, and the exact timing of an entry point may not be totally vital to success (unlike using a leveraged 2X or 3X vehicle). But if VIX is ultimately going to 150 or more, you have to be very careful with the entry point on ZIV. The current stock crash may only be 1/2 over, in which case VIX likely has a lot more to climb, and ZIV a lot more to fall, before the reversal comes.
Anyway, it's an intriguing trade idea which will become a low risk no-brainer should the VIX get up into the 150 or 200 range. Then you could confidently load up on ZIV big time. But until then I'd be wary of building too large a position too early since you could be way underwater fast.
Of course the other way to play it would be the shorter term swings coming from temporary relief rallies, but timing those could be very difficult. The surer thing is a longer term bet on an inevitable return to relative 'normalcy', and for that bet you need a good high entry point. Personally I'd wait and see if VIX gets above 100, or better yet 150, which would put the odds firmly in your favor. At VIX 150 I might even take a chance on ZIV myself :o)
AI
