Spending the SVOL Cash

1 Buy, 2 Increases

Author

Armchair Income
October 13, 2024

Per the October 9th Trade Alert, I exited SVOL. It was approx 4.6% of my portfolio. I plan to buy SVOL back when conditions are favorable for the fund. That’s likely to be 30-60 days away. Until then, I’m reinvesting the cash elsewhere as outlined below, rather than let it sit and earn (only) 4.5%.

What Are Favorable Conditions for SVOL?

Favorable conditions for SVOL are 1/ Falling volatility (as measured by the VIX) and 2/ A VIX futures curve in “Contango”. I can’t predict what the VIX will do tomorrow or anytime in the future, but we can all read the market’s view on expected volatility by looking at a Term Structure chart.

“Contango” is just a fancy name for futures contracts trading for a higher value further out in time. On a chart, this is a line sloping up and to the right like this…

How the Term Structure looks “normally”

Why does it look like this most of the time? Because investors/traders buy VIX futures to hedge (reduce) their risk. The further out in time they look, the more unknowns there are. For this reason, it’s more expensive to buy VIX futures contracts further out. Most of the time, “Contango” is the “normal” state of the VIX futures market.

SVOL generates income by selling contracts further out that are priced high, and then buying those contracts back at a lower price. The difference between those 2 trades is the profit. It’s like “buy low, sell high” but the timeline is reversed.

If you want a more detailed explanation of how SVOL generates income from VIX futures, I covered it in this video. 

The VIX Term Structure is currently NOT in Contango, it currently looks like this…

The VIX Term Structure is falling down instead of sloping up (“Backwardation”)

Why is this? I can’t speak for the market, but of all the factors that might increase volatility, my guess is that the uncertainty surrounding the US election is the factor that is most closely aligned with unusual pattern shown above. Another possible factor is the recent escalation of conflict in the Middle East.

You can check the Term Structure anytime using this link.

Trades

EICC: Bought (2% Allocation)

EICC is a preferred stock issued by Eagle Point Income Company (they also manage the EIC fund). Unlike the floating rate preferred shares I’m in the process of downsizing, this preferred stock distributes a fixed payout of 8% of $25. If you pay more than $25, then your yield will be less than 8%.

EICC can be called (redeemed) by the issuer anytime on or after April 3, 2026 for $25/share. Therefore it would not be ideal to pay much more than $25 for this preferred stock.

I’m buying it because I expect the price to be less volatile than most of my portfolio. Full details of the terms and conditions associated with EICC are available by entering the ticker EICC into the box at the top left of this website, and clicking “Search”.

SPYI: Increased Allocation from 5.03% to 6.69%

This brakes my “5% Cap” rule temporarily. I consider SPYI one of my lowest risk holdings because of the diversification, and conservative covered call strategy. Therefore I’m temporarily parking some of that SVOL cash here.

QQQI: Increased Allocation from 4.79% to 5.85%

Same situation as explained above for SPYI, except that SPYI is based on the S&P 500 and QQQI is based on the NASDAQ 100.

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Regards,

Armchair Income

Disclaimer: I’m sharing information about my investments, but I’m not making any recommendations to you to buy or sell anything. Each investor has their own goals, risk tolerance, and timeline, and must make their own investments decisions…then take responsibility for those decisions. I’m not a financial advisor, and I don’t advise anybody regarding their investments. If the information in this newsletter is useful or helpful in any way, then my goal is achieved :) Some of the links provided above may be associated with affiliate programs. If so, use of those links will not incur any additional cost to the user (and will, in many cases, provide a benefit to the user) and may result in a referral commission to this newsletter.