How I’m guarding against long tail risks

Author: Robert Zingale

Covestor model: Volatility Mean Reversion

In August, I returned to my short only VXZ position because 5th and 6th month VIX futures were too far above 1st month VIX futures to create a solid VXX/VXZ hedged position.

This steep term structure indicates market participants expect more volatile months ahead.  Given these expectations and the persistent Euro debt problems, I plan to maintain my portfolio according to these approximate asset weights:

  • Cash (70%)
  • Short VXZ (20%)
  • Short VXX (10%)

I decided to also short a small amount of VXX since the 1st to 2nd month VIX future roll costs have been so high. However, since VIX futures have been hovering at or below their historical mean-reverting level, I do not want to enter a larger VXX position at this time.

I believe this portfolio will better withstand potential future long tail risks and provide me with the cash to enter into better VIX positions.

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