Looking For The Short Volatility Trade After +170% Year-To-Date

Markets have been made historic moves during these first few months of 2020. Here at Trading Volatility we have stayed focused on following the process of our trading systems to get off to an amazing start on the trading year.

Here is the performance of our indicators in 2020, through March 18th, as tracked by a third party (Collective2):

VRP+VXX Bias:   +170%


-  VXX Bias:   +238%


Subscribers to these blog posts have known since last September that something like this was coming, as I outlined in "The Once-A-Decade Volatility Trade" post. In that article I wrote

"Your opportunity is to join us now because once the next volatility spike it's too late. Our gains will be made and those without hedges in place will have lost. It's that simple."  

I'm sorry to say that it is now too late for non-subscribers to capture the full extent of this move.

However, there is still an opportunity to capture additional gains on upside from a long volatility trade (via VXX, UVXY, or TVIX) as well as "The Once-A-Decade Short Volatility Trade" which will happen after this current volatility spike runs its course.

In fact, as I've previously written in my Market Crash Protection post, our indicators successfully identify times when the market is strong and it is appropriate to short VXX (or buy an inverse ETF such as SVXY or the much-anticipated SVIX). The short volatility side of the trade is historically where most of our gains come from.

2020 has been a big year on the long volatility side of the trade and I expect it to be just as big on the short volatility side of the trade as we make our way through the Coronavirus (COVID-19) crisis.

These are difficult times and I believe that our automated trading process can be an enormous benefit to anyone who wants to be able to filter out the noise and emotional pitfalls of trading in this market.

As you know, I was not exaggerating when I said we will have the "Once A Decade Volatility Trade" and I am not exaggerating when I say we will have "The Once A Decade Short Volatility Trade."

Join us as a Trading Volatility+ subscriber so this next opportunity doesn't pass you up.


You can view what we offer to subscribers at our Subscribe page. Considering the information you get from our service, our subscription prices are actually ridiculously cheap. And for those who are afraid of commitment, we offer day passes with full access to our site for as little as $4/day.

To learn more visit our Strategy page. You can also view all the trades that our strategies have generated over the years by looking at the spreadsheets on the Results page or links to Collective2. We strive to be as transparent as possible with our service.

Free E-book:
If you'd like to learn more about our how volatility ETFs work you can read our free e-book, Fundamental Concepts and Strategies for Trading Volatility ETPswhich is available for free download. If you are curious about how our Bias forecasts work and why they have been successful in identifying long-term trends under a variety of market conditions, be sure to give this a read. It explains the basic concepts of VIX and VIX futures as well as the main price drivers of various volatility ETPs, including the popular funds VXX, VIXY, SVXY, UVXY, ZIV, and VXZ. I believe that the concepts outlined in the e-book are critical to understand if you're going to trade these products.
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Hypothetical and Simulated Performance DisclaimerThe results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Hypothetical and backtest results do not account for any costs associated with trade commissions or subscription costs. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY, VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET


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Intro To Using The Volatility of Volatility Index (VVIX)

Many people have some knowledge of the VIX, the volatility index for the S&P 500. It provides a measure of the expected volatility of the S&P 500 over the next 30 days. It is widely covered by financial media and cited extensively, especially during market sell offs when it is often referred to as the "fear gauge" since it tends to spike higher as the S&P 500 moves lower. (Those new to VIX can read all about it on Investopedia).

However, not many people know about VVIX, which is the volatility index for VIX. Using similar methodology, VVIX provides a measure of the expected dispersion of the VIX over the next 30 days. 

On Sept 20th I tweeted this chart about VVIX, which identified concerns about the market. Most people, including traders who spend a great deal of time in the volatility world, pay little or no attention to VVIX. However the gauge is actually quite useful to those who take the time to study its behavior and I'll discuss a couple of entry-level points in this post.

I like to refer to VVIX as the "panic gauge" since it tends to spike to its highs as the VIX moves higher. Generally VIX and VVIX move in the same direction, but when VVIX diverges from VIX it can provide useful information about market conditions. I'll provide some examples of what to look for using the following weekly charts which show the S&P 500 (top graph), VIX (middle graph), and VVIX (bottom graph) over the past 30 months.



First note how VIX and VVIX are generally moving the opposite direction of the S&P 500. This is by no means a law and it is quite possible that all could move the same direction (that explanation will have to be a topic for another day). However it is always important to note when the indices are not moving in their typical inverse correlation manner so that the behavior can be explored.

I've circled recent S&P 500 highs (Jan 2018, Sep 2018, Apr 2019, Jul 2019, and Sept 2019) in blue and lined up the corresponding VIX and VVIX values (yellow lines). I've also used green support lines to indicate times where SPX, VIX, and VVIX are diverging from their typical behavior.

Note that at most of these times where SPX was at or near all-time-highs, VIX and VVIX were near recent lows. But the subtle difference in Sept 2019 was a VVIX at 100 is roughly 25% higher than it should have been given S&P 500 highs and a VIX of only 15.

That 25% difference in VVIX (a reading of 100 versus an 80) is not trivial and has a specific and direct impact on the price of VIX calls by nearly doubling their price. So what we had the week of September 16th were large investors showing up to pay a 90% premium for portfolio hedging via VIX calls (this premium was demanded by sellers of the VIX calls), and thus the reason for concern.

VIX spiked 40% and the S&P 500 fell nearly 5% over the following 2 weeks after I posted the VVIX chart.


Another way, VVIX can be useful in detecting tradable market bottoms. When VVIX does not confirm with higher highs while VIX moves higher, it is often a sign that panic is subsiding and large buyers are stepping in (see dashed line at Dec 2018). As VIX spiked higher to 35, VVIX diverged from its October peak of 150 and only reached a December high of 112. This was a signal that investors had already sufficiently hedged their portfolios and VIX calls were no longer in demand, i.e., the "panic" was over although "fear" was still elevated.

There are many nuances around VVIX which require close inspection. You can look specifically at the implied volatility on VIX  options to gain additional insight whether VIX is skewed to the upside or downside. This can be done by looking at your broker's option data or by looking at the data on our new (Free) Skew Charts Page. As an example, the current VIX skew looks like this. showing a high premium for upside VIX calls.


I invite you to visit the page and look at the current VIX skew or skew for any other stock with options. As always don't hesitate to Contact Us with any questions.









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Don't Fight The Fed?

Ex-Goldman Sachs CEO, Lloyd Blankfein, felt compelled to hop on Twitter yesterday to remind people of this investing platitude.


The assumption by most readers is that he is referring to being long or short the stock market. However, you would be deeply mistaken (and poor) if you followed this adage and applied it to stocks.

Take five minutes and review the Federal Reserve's actions on interest rates since 1970 to see for yourself how useless it is against stocks.

Or, just take a look at the following chart which tracks the Federal Funds Rate vs the S&P 500 and decide if it makes sense to be short stocks when the Fed is raising rates, and be long stocks when the Fed is lowering rates.



If you need any more help, you can take a look at the follow chart which shows the Fed lowering rates from 2007 - 2009 vs the VIX. 


Yes, that's right. If we apply this adage to equities you would buy stocks in Sept 2007 and keep on buying as the S&P gets cut in half and VIX spikes to 80 in late 2008. 

I don't recommend you do this.


Instead, apply this adage elsewhere. As you can see from the chart below, this rule really only applies to bonds.



When the Fed is on a tightening course (that is, they are raising rates) don't be long bonds. You need to be short bonds since their prices fall as yields rise.

When the Fed is lowering rates, don't be short bonds. You want to be long bonds since their prices rise as yields fall.

The Fed Funds rate will generally line up pretty well with the U.S. 10-year bond's yield. As of yesterday the Federal Reserve set its rates to a range of 1.75 - 2.00% vs a 10-year yield of 1.77%. At this point we probably have to assume rates at headed back to at least the 0 - 0.25% range as the Federal Reserve does everything in their power to delay the next recession.

As for what we can expect from equities there is less of a guarantee. Generally rate cuts happen just before or during a recession and equities move steeply lower. 

This provides further evidence for the setup of our Once-A-Decade Volatility Trade that we discussed last week. It is time to properly prepare your portfolio and be ready for this trade by applying smart tail-risk hedges. 

For more information don't hesitate to reach out to us via the Contact Page or visit our Subscribe Page







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New Tool For Identifying Stocks Ready To Move Higher On A "Short Squeeze"

Our primary focus at Trading Volatility has been to identify the big trends in the market so that people can place trades in volatility ETPs. The idea is to place swing trades (~20 trades per year) for market-beating performance using short volatility (SVXY) and and long volatility (VXX).

Now there is a new tool available for people who prefer to look at unique opportunities in individual stocks. 

I've created a dashboard which measures stocks' "Naive Gamma Exposure" ("Naive GEX"), as measured by all outstanding options contracts. Specifically, it measures the amount of shares that Market Makers must buy/sell in order to remain neutral in their trade book given a certain set of assumptions. (see below for an introduction on the inner workings).

The dashboard is updated throughout the day. I've been posting the dashboard results to twitter and to an automated email distribution list (which is currently free) for everyone to follow.






Be sure to check out all the new tools for individual stocks at http://stocks.tradingvolatility.net including Max Pain Charts, Gamma Exposure Charts, and Yearly Pivot Markers. And stay tuned here for more updates as these tools evolve.


Part 2:
*Alright. Let's get technical to see why this "is a thing":

There has been recent research published into the concept of "Gamma Exposure" ("GEX") on the book of options Market Makers.

In summary:
- Market Makers provide a market for people to buy and sell options.
- Market Makers don't just take the opposite side of the trade that investors take. They hedge their exposure so that they can profitably manage an options book.
- The hedges must be re-hedged daily so that their position can remain neutral as the underlying stock prices move.
- In scenarios where "Gamma Exposure" gets off balance to the negative side, Market Makers must sell as prices drop and buy as prices rise, accentuating the movement in stocks. Oversold conditions result in a setup for a short squeeze, where both investors are buying oversold conditions AND Market Markets are re-hedging their positions by buying as the stock price rises. The result is a pop higher in the stock.

- Our leaderboard takes daily measurements for a fixed set of ~80 stocks automatically.
- Visitors to http://stocks.tradingvolatility.net/gexCharts can look up their own symbols, which will get added to the leaderboard as well.


What gets measured and displayed in the Dashboard:
- Our data looks at all options contracts with less than 94 days to expiration.
- "GEX(shares)" is calculated by summing gamma from calls at every strike (gamma * Open Interest * 100) and puts (gamma * Open Interest *-100).
"GEX($) per 1% move" the equivalent dollar value of GEX for a 1% move in the underlying stock. This is how much of a stock MMs must buy/sell per 1% move in order to remain neutral in their positions.
"GEX/Volume" is the ratio for GEX (in shares) to the daily average trade volume (in shares). The more negative the GEX/Volume ratio the better the opportunity for a squeeze higher. This impact of this value is relative to the security's historical GEX levels. 
- The "Flip Point" is the level where gamma changes from positive to negative, or vice versa.
       - While above it, stock movement gets suppressed (Market Makers re-hedge by buying as stock goes lower, and selling as price moves higher).
      - When below, stock moves are accentuated (MMs re-hedge by buying as stock goes higher, and selling as prices moves lower).
- "Code" tells you when there is a change in Gamma Exposure from positive to negative or vice-versa. Generally, a change to positive GEX (Code 1) is positive for movement of the stock price, while a change to negative GEX (Code 2) is negative for the stock price.

Other Notes:
- GEX calculations apply for symbols under the assumption that investors are primarily selling calls and buying puts (Market Markers buy the calls and sell the puts, then hedge their positive delta by shorting shares).
- GEX works differently when investors increasingly buy calls and/or sell puts, as is often seen in inverse ETPs, VIX, VXX, and speculative assets. When this happens, the Naive GEX values above need to have their polarities reversed since the composition of investor option buying/selling given in the GEX assumptions has become largely inversed.




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The Once-A-Decade Volatility Trade

The once-a-decade moment that we as volatility traders look forward to is on the horizon and quickly approaching.

This is a significant change in the market. After all, the majority of our gains here at Trading Volatility have been made by betting on a decline in volatility by buying inverse volatility ETPs, SVXY and XIV, as can be seen in our past performance updates (20132014, 2015, 2016, 2017, 2018 & 2019: see below). The easy money has been made by shorting volatility in this bull market.

The moment I'm referring to is the coming stock correction that has been set up by a a record 12-year bull market and driven volatility levels into the basement. After hitting a low of 8.56 in November 2017, the VIX has been putting in a higher base which now sits near 12.0.



At this point we need to shift gears and be ready for the big gains. I'm talking about the gains that come from being long VXX and often happen in a short period of time. As you can see in the charts below, October 2008 is the best example of what we're about to see (May 2010, Aug 2011, Aug 2015, Feb 2018, Oct 2018, and Dec 2018 are examples of "more ordinary" months with VXX trades). Most people in this market are greedy in buying stocks and now is the time to be looking at taking the other side of the trade and buying volatility. 




Many people have disregarded the warnings about the yield curve inverting as a signal for a recession. However, the reality is that the yield curve has inverted (where 3-month bonds yields are higher than 10-year bond yields) in many countries across nearly every continent in a sign of global recession.  

Dozens of Central Banks are doing their best to fight a recession and spur growth by cutting interest rates. The continuation of falling bond yields around the world, often into negative interest rate territory, signals a world of declining growth. 

Corporate Insiders are selling their stock at a pace not seen since 2007 as doubts about the sustainability of these valuations grow. 

THIS. IS. HAPPENING.

There's just one little problem though.

You can't just sell your stocks to move to cash, buy inverse ETFs or just buy VXX yet. 

Why? Because the Federal Reserve still has the confidence of investors. There are rates to cut and Quantitative Easing to promise and/or deliver, which could drive stocks higher. 

Or not. Maybe market participants get collectively concerned if the Fed sees the situation as dire enough to make big rate cuts and push liquidity into the system as they did in the 2008-2009 financial emergency?  Perhaps we come to realize that the problem is rates are already low due to the inability to raise them from the emergency levels of near 0% set 10 years ago.

Since the timing for a stock correction is difficult to predict, what you can do now is diversify. Carve out a portion of your portfolio and dedicate it to protecting your gains through a form of "tail risk" insurance using volatility. 

"Tail Risk" as most people think of it is generally a losing proposition that can be as simple as buying VXX, UVXY, or TVIX or as involved as buying rolling puts or selling calls on the S&P 500. This is quite simply, a terrible idea. It works maybe once every 10 years, but only to the extent that it would have been better to not do it all. There is a built in Negative Bias against volatility ETFs due to how they are designed -- it is precisely why VXX quickly lost 99% of its value 5 years after the time it was first launched in 2009.

Our form of Tail Risk protection is different because it is dynamically allocated:
  • When there is no immediate danger we are actually short volatility and collecting premiums from all those who are continuously buying protection. It generates gains.
  • Our indicators inform us each day on whether the likelihood of a spike in volatility is significant, and prompts us to move to cash or long volatility when necessary. 
  • By doing this we don't spend money on portfolio hedging when it is unlikely to make money. We only hedge when necessary.  

We've been providing services for applying dynamic volatility positions using strict rule-based decision making to investors for over six years now with an average annual gain of  over 40% per year

Our offerings have grown and are now used by people investing small $10,000 accounts and Financial Advisory managing $100,000,000+ in assets. 

Your opportunity is to join us now because once the next volatility spike it's too late. Our gains will be made and those without hedges in place will have lost. It's that simple.

We make it as easy as we can for people to follow our strategies by sending automated signals change alerts, preliminary alerts, and daily summaries.

Check out what we offer to subscribers by viewing our Subscribe page. Considering the information you get from our service, our subscription prices are actually ridiculously cheap. And for those who are afraid of commitment, we offer day passes with full access to our site for as little as $4/day.

To learn more visit our Strategy page. You can also view all the trades that our strategies have generated over the years by looking at the spreadsheets on the Results page or links to Collective2.


Free E-book:
If you'd like to learn more about our how volatility ETFs work you can read our free e-book, Fundamental Concepts and Strategies for Trading Volatility ETPswhich is available for free download. If you are curious about how our Bias forecasts work and why they have been successful in identifying long-term trends under a variety of market conditions, be sure to give this a read. It explains the basic concepts of VIX and VIX futures as well as the main price drivers of various volatility ETPs, including the popular funds VXX, VIXY, SVXY, UVXY, ZIV, and VXZ. I believe that the concepts outlined in the e-book are critical to understand if you're going to trade these products.

------------
Hypothetical and Simulated Performance DisclaimerThe results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Hypothetical and backtest results do not account for any costs associated with trade commissions or subscription costs. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY, VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET


. . . . . . . . . . . . . .

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