I’ve been in Vegas for the past week exploring some new business opportunities and marveling at the woeful state of real estate there. You can actually buy a pretty nice condo for $30-45 K at the frequent foreclosure auctions and foreign investors are snapping them up in lots of 5 and 10 to resell to their countrymen. Meanwhile, unemployment is at a record high as new casino construction has come to a screeching halt after the debacle of the $8B City Center project. It will come back someday. In the meantime, the situation is grim.
OK, back to the chart d’ jour, a pair trade of VXX and XIV, 2 ETF derivatives of the VIX that trade like stocks with huge daily volume in 8 figures. VXX also has an impressive open interest in options with $.10-.15 spreads ATM. I show this pair as part of a larger market neutral trading model I’m researching that includes VXX/XIV, TLT/TBT, SSO/SDS and QID/QLD. The VXX/XIV setup is a popular daytrading venue but can be profitably traded on a daily bar basis, as can be seen above
These market neutral and delta neutral strategies are a unique spin on long/short trading and contain safety factors not available with directional trading. Over the next few weeks we’ll explore a few setups to further evaluate the relative attractiveness of this approach. This net returns of these setups returns are typically muted when compared with directional trading but the potential drawdowns are minimal which, especially in this trading environment, makes them worth more than a second look.
