Level III and VIX

I started studying for Level III exams 2 weeks ago. So far I have finished just one of the books (out of 6). The material here isn't tough (so far), but its mostly new for me. It deals a lot with behavioral finance and portfolio allocation, which I hadn't studied properly in school. Because of all the new things, I am finding Level III to be a lot more interesting.

But I must say that the writers of the curriculum waste waaaay too many words. They can't seem to get to the point. There is probably a hidden purpose to the elaborate discussions other than making me want to go to sleep. But then again, I went through some of the abridged Schweser notes that people keep talking about, and didn't find them to be helpful at all.

I have about a month left to study, and at the rate I am going I probably will end up cramming.

On a separate note, I wanted to bring attention to VXX. I looked up the documentation by Barclays a month or so ago, and decided to short it to 0. I have made over 20% in a month, and I am fairly certain its gonna continue.

VXX was basically designed to mimic the Volatility Index, but the way it mimics it is kind of dodgy. It does so by trading one and two month futures, and needless to say it fails terribly. The cost of rolling over the contracts can be quite significant (5%-10% a month), and even if volatility rises sharply in a day, its highly unlikely that the 1 month future on the vix will react in the same way. The best part is that volatility is not even a real asset and the expected return on it is 0.

To be on the safe side, I have decided to not let the short exceed 20% of my portfolio. But who knows if everything starts going down, I may be forced out of my position due to a short squeeze when volatility peaks. And in the process lose my shirt.

I have read blog posts touting the virtues of VXX as a portfolio insurance. Personally, I think the writers have no clue what they are talking about. Buying the VXX is a very very inefficient way to hedge your portfolio. If you want portfolio insurance, you are likely better off shorting the VTI or buying some puts or just taking your cash/gold and putting it under the mattress.