Never Over Extend in Volatility Trade

Never Over Extend in Volatility Trade

Never Over Extend in Volatility Trade

I am sending this email in the night.

Volatility play had crazy action in the last 24 hours

• If XIV was rebalanced at 4 PM yesterday, its NAV would have been $99. Instead, they rebalanced at 4:15 PM yesterday (which they do every day, and that is not the issue. M1/M2 changed "drastically" in those 15 minutes, that is the issue), and its NAV was $4.22. XIV was never traded at $4.22 on Feb 5. Every day, this goes on. No accountability. No checks. Howard Lindzdon, the founder of StockTwits is organizing a class action lawsuit against XIV. Contact him if you are a XIV sufferer. Anyway, XIV closes. What about SVXY?

• SVXY is similar to XIV. Its NAV yesterday was $3.91. Lesser than XIV. They delayed trading today. And opened trading late with a quote of $11 plus (even though last evening 4:15 PM NAV was $3.91). SVXY touched $13 after hours.

• What does the above 2 bullet points prove? Wall Street crooks at their best. Who is the sufferer? The retail investor, who had his hard earned money in his retirement account or brokerage account

• Having said that, let us understand Volatility trade. Instruments like UVXY VXX TVIX are designed to go down and SVXY XIV designed to go up. IF. The big IF is, we should be in Contango i.e. M1 < M2. The moment this changes, one needs to get out – as per Chapter 16 of my book. Or have an hedge. You can contact "experts" on StockTwits on how to hedge. You buy a UVXY call and hedge. In that case, you are only paying theta. So, I alway advocate cash is your best hedge. Anyway....The past few days action was unprecedented. All 7 months months went into backwardation. And if one sells UVXY calls (or had shorted UVXY TVIX earlier) and does not close them, they would get margin call. Unfortunate, but that is what happened past few days to many.

• I have repeated 2 things multiple times. It is all about M1 and M2. And its all about cash management. One can never get over extended in the volatility trade and survive.

I will again refer to my blog

which I wrote 10 days back. Right from that day, I knew that the volatility trade is being manipulated. One has to just control M1, and M2 to control the fate of XIV SVXY UVXY VXX and TVIX. End of the day, a nice attempt at wiping as many volatility shorts out, as “they” could.

M7 and M8 in Contango

As I type this, M7 and M8 are in Contango. Slowly, we are returning to normalcy. Remember this sentence:

Volatility mean reverts, but Contango losses are for ever.

This rise in Volatility has to revert to the mean. Its not a question of IF. It’s a question of WHEN.


I will end with a quote from a dear friend of mine with whom I was chatting today:

Never over extend yourself. It is very tempting to over extend. But if one can make $ by shorting volatility with a very small % of total portfolio and have rest in cash, one can sleep peacefully at night.

Good Luck and be safe 

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 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.