Volatility Trade - How to stay resilient.
Jan 30th 2018 was an interesting day. And at mid day yesterday, Brennan, the coauthor of my books texted me that I should cover how to stay resilient during “challenging times” when you are short volatility. So, today’s email covers this topic.
Always remember the big picture
Remember that UVXY has dropped from $41 million to $11 in 7 years. Remember that in general (not always), these funds (UVXY, TVIX, VXX), on a daily basis, make loss making transactions – sell a cheaper M1 to buy an expensive M2. So, over a longer period of time, UVXY, TVIX, VXX will fall in price.
Don’t over extend yourself
We have seen many guys on stocktwits who never learn their lesson. They will short and then short more. Then regret that they over did it. Fortunately, they will get saved. Instead of learning their lesson, next time, they will short the same amount and again over extend themselves.
If one has a simple rule of keeping 50% cash at all times (if you are in the short volatility trade), it would be of a great help
Learn to step away if needed
Yesterday was a day, when for more than the half of the day, I never made a single trade. I was watching the indexes, watching M1 and M2 on VIXcentral.com and just having fun (while my portfolio was getting into a mess no doubt).
There is no needed to trade for the sake of trading!!
For those who have never seen “backwardation” in real life, we saw one yesterday – only that it was for a brief time. Soon, we reverted back to Contango.
In the above link, you can see the screen shots of the backwardation which was seen for a brief period of time yesterday (Slide # 1) after which Contango returned (Slide # 2)
Have a Plan
Monitor your portfolio and have a plan. I can explain based on my current positions. When UVXY rises, brokerages raise the “margin requirements” to protect themselves as well as investors like me. Perfectly understandable and nothing wrong with that.
Yesterday, at least in the morning hours, one never knew where all this would end. M1 and M2 could have kept on rising for a few more days, there by making UVXY rise and SVXY fall.
I re-balanced my portfolio during the second half yesterday, by diversifying and that helped a lot later during the day as well as today when I see my portfolio.
Rebalancing Example 1:
I had sold Feb 9, $10.5 UVXY 10 calls at $0.38 per call some time back in the past and had collected $380. If things go on this way with UVXY rising, I would need to use another $10,000 or more to pay for the short assignment next Friday.
So, during the day, I closed these calls for $2,300. Loss was $2,020. But since tastyworks.com reduces appx $1,000 as buying power per call, it increased my buying power by $10,000.
Next, I sold 1 April 20, $9 call for $485, 1 April 20, $10 call for $453, 5 April 20 $ 11 calls for $145 each (total $2075) and 1 April 20 $12 call for $ 295 – netting me a new premium of $3,308. The buying power reduced was only $8,000 as there were only 8 calls sold.
Thus, my increase in profit was $3,308 minus $2,020 = $1,288. With this “roll”, I was not only able to increase my profit from $380 to $1,288, I was able to free $2,000 of my buying power because I closed 10 calls and sold only 8 calls.
Rebalancing Example 2:
Another example. Sometime back, I had sold one UVXY Feb 16, $10.5 call for $1.02. I closed the call at $2.60 thereby having a loss of $158. Then I bought a TQQQ Feb 9, $173 call for $7.65. This is on the premise that since a lot of tech companies like FB, AMZN, MSFT have to report in the coming days and TQQQ had fallen so much yesterday, my estimated is I can make much more than the $158 loss that I took. All these actions I took was to be creative, try to think out of the box and see if these would work. That would help me in future!!
Rebalancing Example 3:
Another example. The previous day, I had sold one UVXY June 15 $11 call for $3.45. Later during the day, when NQH8 (March Nasdaq mini futures) dropped a lot, I thought it was worth while that I sell this UVXY June 15 $11 call which I did close for $535. Loss was $182. Next, I went and bought 1 NQH8 at 6930. Currently, NQH8 is at 2961. This gives me a profit of (6963 – 6930) x 20 = $660. So, I sacrificed $182 only to get back $660.
I have decided to hold this NQH8 till it reaches 7000.
There is no need to aggressively rebalance your portfolio now!!
A better way is to stay invested in a diversified manner right from the start. After writing 2 books (one on Volatility and another on indexes), my portfolio consists of Volatility shorts, index based ETFS like (SPXL, UPRO etc.), Index Futures (NQ, YM, RTY, ES) and small percentage in cryptos.
And I see some who are 100% in Short Volatility, and they indeed suffered a lot of pain for the past 10 days!!
If you read our index book, we stay away from individual stocks. So, if you are in the short volatility trade and want to diversity, there are lots of options. One can go for stock market index based ETFs like SSO, UPRO, SPXL, DDM, UDOW, URTY, SPY, DIA, IWM etc. which only go up longterm.
You can download our free index book from
Or you can even get into Index Futures, which open a new set of possibilities and profitability!!
Thanks and Happy Shorting Volatility
Even if one life is changed by our educational attempts, we would consider our efforts in writing the book a success.
The material in this newsletter, the website http://IndexInvesting.xyz as well as in the book "Trading Volatility - Using the 50-30-20 Strategy" is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. As an investor, you are fully responsible for any investment decision that you make.