Portfolio Hedging with VXX

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Risk aversion is high and sentiments bearish. Markets are pricing in the risk of contagion in europe as Spain just saved a local bank. War creates more fear as tensions are arising in North/South Korea and Iran/Israel with US military increasing their prescene in both region. 

One of the ETF to consider for portfolio hedging in times of volatility is VXX (the short-term futures ETN for VIX). If it crashes, this one is a potential >50% gain (though those who bought in March/April would have already gotten 100% ..

If it doesn't, the portfolio value will go up and VXX goes down .. but will likely negate and breakeven.

This trade is more for those who like to keep the portfolio intact and collect dividends but want to offset some of the losses if the market do crash.

More information can be found at http://www.ipathetn.com/VXX-overview.jsp



Some related articles about VIX by other traders/investors.

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• You Can Cash In on Volatility (fool.com)
• Revisiting my VIX trade (investmentpostcards.com)
• How to Play the Market Plunge (online.wsj.com)
• I have just hedged my equities by going long volatility (investmentpostcards.com)

How market perception feeds itself

How a market crashes | Analysis & Opinion |

How a market crashes
May 6, 2010 16:30 EDT

How can the market go, on a random Thursday afternoon, completely insane? The story which is emerging centers on old, boring Procter & Gamble, as can be seen in the PG chart from this afternoon.

pgtips.tiff Look at the volume chart: what you see here is a big block of shares trading in P&G at around 2:30, followed by another huge block right before the market crashed. And then, nothing. The two big blocks were probably sell orders, which were big enough to blow through all the bids in the market. As Henry Blodget says, “for a few minutes, buyers just disappeared”.

It’s worth noting here that none of this data is particularly reliable: the Nasdaq is reportedly confirming that there were technical problems with the P&G quote, and there are persistent rumors of a “fat finger” trade as well, which I’m not sure that I believe.

This was what I was talking about. Short-term, market sentiments determines the price. Long-term, fundamentals determines the value. All it takes is market perception to take a turn for the worse, someone starts selling, market participants see the panic selling and joins in the fray (either because investors emotions of fear or traders taking advantage of short-selling). Computer programs see a certain decline in price and starts selling.. and the death spiral begins and feeds itself.

As I am still in the money for my portfolio, I will monitor the situation and hopefully, this weekend, ECB do something instead of saying something and help change market perception.

Portfolio Update April 2010

2010 Year to date (YTD) Return Portfolio 3.95% Equity(Include Funds)  4.29% Direct Shareholding 7.42% Dividend/Coupon/Interest received for 2010 $42,981 Absolute Return Since Nov 2007 Portfolio 9.04% Equity(Include Funds) 20.31% Direct shareholding 22.43%

1) Fear in the market once more. The Greece issue have brought up fear of a contagion on sovereign debts. Defaults are not likely as government interventions have proven to be the defacto way of solving monetary issues. Debt issuances thru' a fiat currency system supported by the Euro is sound as long as Greece guarantees the debt payment thru' taxations and prudent financial measures (that's why Euro wants Greece to adopt austerity measures). Though inflation becomes a side-effect as paper money losses its value.  I am still long in the market as I believe this is possibly a correction in the on-going bull. But I will stick to proper money management strategy and adhere to my trailing cut loss for my positions. Most times, market perception creates trend we can either go against or go along with.