Editor's Note

The only guarantee for the next two days is an increase in volatility. Even if the Brexit vote is to remain in the EU there may still be volatility because funds have been positioning for a remain vote for several weeks. There could be a major market spike on the initial news that is sold a day or two later. Whenever the market expects one outcome we would plan on the opposite.

Everyone expects a market meltdown if the vote is for an exit. However, since there is a minimum, two-year countdown clock nothing is going to happen immediately. Funds are currently holding record levels of cash at 5.7%. They may buy the dip in heavy volume in advance of the expected positive earnings in Q4.


No New Bullish Plays


VXX - Ipath VIX Short Term Futues ETN - ETN Profile

The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.

On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.

I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.

Because this is a flawed product it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.

With a VXX trade at $17, short the VXX, no stop loss.
With a VXX trade at $20, short the VXX again, no stop loss.
With a VXX trade at $25, short the VXX again, no stop loss.

If we are successful in entering all three positions our average entry price will be $20.66 assuming you shorted an equal amount in each transaction. I would have no problem with increasing the quantity on the second and third position because it will always go down with the exception of short term spikes on market corrections.