Last week the highly speculative VIX volatility index (S&P 500 volatility) exploded, causing losses to short players, similar than in February, but to a much less extent. The curve of the different VIX futures inverted, changing from contango to backwardation. Contango provides a continuous income for short sellers, and backwardation, a continuous income to long buyers. (As I explained it earlier here.)

Knockouts can hit you

VIX futures are in contango most part of the time, yielding a lot, sometimes 5-10 percent a month for short sellers. The problem is when contango switches to backwardation or quick and strong price movements are coming. Sometimes futures jump like hell and many shorts are knocked out. (Losing all its value.)

Chart courtesy of StockCharts.com

This is what happened in February, and this seemed to happen last week. VIX futures was jumping again and changing from contango (green line on the chart below) to strong backwardation by near settlements (orange line). Only the second time this year. But today, the ghost seems to be stopped. This morning, with US markets closed but European stock exchanges open, we see a horizontal and then climbing line, a small contango again (blue line).

(Vixcentral)

Why? On Tuesday, fears on stock markets retreated and indexes skyrocketed. Maybe we have seen only other temporal correction, or not even that, a little fear from correction, the fear from the fear? Can we prepare for this year’s Santa Claus rally? (A rise in stock prices at the end of the year, mostly at the second part of December.)
I can’t know it, I’m prepared to both bear and bull market, with combined Tesla short and VIX short, and gold mines. (More here.) If good times are coming in winter, it’s very probably VIX will normalize in a lower range and with a nice contango. If correction or bear market approaches, Tesla shorts (and maybe gold mines) can be a good choice.

Chart courtesy of StockCharts.com

If nothing happens in a longer period of time, Tesla can oscillate but make nothing important at the end. Meanwhile, VIX can provide a contango related income. But how risky VIX shorting is, you can observe on the graph of the SVXY ETF above.
(Never buy VIX, or almost never. I personally would buy VIX only if VIX futures fall to near 10 like last year. Too risky to hold VIX longs because of the contango.)

Disclaimer:

I am not a financial advisor and this content in this article is not a financial or investment advice. It is for informative purposes only, or simply to make you think, entertain, increase testosterone and adrenaline level. Consult your advisers before making any decision.

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(Cover photo: Pixabay.com)