Investing

Volatility trading

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  • Oct 15th, 2019 3:00 pm
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[OP]
Newbie
Aug 25, 2019
18 posts
7 upvotes

Volatility trading

Although there is no easy solution in volatility trading, would shorting UVXY make sense (in unregistered account only):

A few obvious variants to trade volatility (at least I am aware of): buy VIX calls when it's in 11-12 range, with long/longest expiration date (ie. 5-6 months). Or when VIX is 11-12, buying spread bulls (ie. 14-16) hoping for a spike. Or when VIX spikes, try to buy puts (or bear spread) with short/mid-term expiration (hoping for a quick come back to 11-13 range), however taking into account politics/China talks now, quite risky trade... Also VIX has a "bottom" at 10/11/12 ish. As well, alternate trade would be (once UVXY spikes) - buy puts or buy bear spread...

That's said, I am trying to approach volatility from a different side and simplify/minimize risks, would it make sense to short VXX/UVXY? (VXX was recently introduced however apparently has similar pattern).

Trying in my IB demo account, maintenance margin is huge (appr. multiply of x3.5 of the position; plus seems some interest to be paid for borrowed shares); however it tends to decline permanently with exception of a few spikes, chart shows good % number since introduction. Seems it's similar to buy and hold (but sell and hold) approach.

From your experience, could this approach (passive) be utilized for a small % of the account? Any other issues/risk I am missing?

I've seen discussion here what would happen if buy/hold TQQQ in a recession (might evaporate); curious how UVXY would behave in a recession similar to 2008.

Thanks
3 replies
Deal Fanatic
User avatar
Oct 9, 2008
5681 posts
2235 upvotes
Thornhill
Image

This method of 'easy money' wiped out many o' accounts back in the last 'VIXplosion' event. Trust me, you're not the first who thought of this and you won't be the last. Picking up pennies in front of a steamroller is easy, until it's not. There's a reason why SVXY & UVXY is no longer leveraged..

Read this while on the toilet because it should share the *hit out of you Face With Tears Of Joy - https://www.ft.com/content/288fb178-1bf ... db76e69936
Deal Addict
User avatar
Jan 28, 2012
1629 posts
461 upvotes
This was an easy trade for years until everything blew up in 2018.

XIV was the primary inverse VIX etf and made obscene amounts of money for a long time, especially in 2017 when it went from $50 to well over $100 in one year. Go google articles about XIV pre 2018

Then in Feb 2018 a volatility spike completely destroyed these products, and they lost 90-95% of their value literally overnight. There were people with million dollar portfolio's focusing on inverse VIX investing with these things who lost everything.

Edit: also most of these products either folded or are shadows of their former selves, they are now less leveraged and even in good market runs aren't really returning anywhere near what they did before. And ask yourself if you really want to be shorting VIX with president cheeto on the ropes and becoming more and more volatile lately... before trump inverse VIX investors mostly worried about another 2008 "crash", now a single tweet can wipe you out.
[OP]
Newbie
Aug 25, 2019
18 posts
7 upvotes
Thanks @Jeenyus1 and @Rhaegar .

Looking at UVXY chart, ie last 2-3 years, or any period from the start in 2011, would it be better approach to wait for a spike in volatility, and sell UVXY spread bear with 1-2 year till expiration. for example, if hypothetically UVXY spikes next week from current $22 to let's say $40, buy bear put spread 32/27 (ie. buy put @32; sell put @27); max profit as long at the price deep below $27 by the expiration. unless i am simplifying (or not taking a real recession into account), if exp. is at least 1 year, this bet would be profitable? so the max.risk is the premium paid upfront. then if the price keeps moving up (above $40), add more bear put spreads,

Edit: not starting anything till next November' election result, and China resolution.

Thanks

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