Tuesday, February 18, 2014

Trading Volitility


Last year was my best trading year ever.  I decided to refocus my efforts in trading and have evolved into mainly trading volatility instruments.  I will also play some momentum stocks as they come up, but I'm primarily watching the VIX and sell puts when the VIX gets high, which is now between 18-20 point range.  I will also start shorting the VIX, via selling calls on UVXY, when volatility finally collapses.

Below is a chart of the VIX for the last year.  You can see in 2013 the VIX had 6 spikes above 18, including the 1st day of the year where the VIX was over 23.  After each spike, it quickly fell an average of 40%!

Since you cant directly bet on the VIX you need to use ETFs like VXX, UVXY, XIV and SVXY to make your bets.  UVXY is a 2X leveraged fund and will move 2X the VIX futures, so it will decline twice as fast or increase twice as fast.  UVXY will decline an average of over 50% when the VIX collapses.


Chart of UVXY for 2013, the numbers are huge because UVXY has a few reverse splits during the year.  This is an ETN that can actually go to zero, but it routinely has 10:1 or 4:1 reverse splits to get its nominal value back up.  Just sell this short or sell naked calls, it eventually will go to zero, but can have huge spikes up before it does, but it never lasts for very long.  The spikes up are usually not more than 4 weeks.

The nice thing about trading these instruments is that if you can follow the market direction, you can really out perform the indexes, since they move so much faster than the index you can make up loss ground quickly.  So when the market starts to turn down, go long UVXY.  It usually rises 4X what the decline in the S&P is.  When the market starts to climb back up or stabilizes, then buy the SVXY and short UVXY.  Your gains should be 4X the SandP rate of return.  Usually the problem with these ETFs is staying in them long enough to gain the benefit.  Since they move so quickly, they can scare you out of your position so you need a strong stomach to with stand the volatility.  Trading volatility is volatile, but volatility always reverts back to a mean!

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