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 (2013, 2014, 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 ETPs, which 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

2015 CBOE Risk Management Conference - Attendees get 30% off Subscription to Trading Volatility+

CBOE's Risk Management Conference is the premier educational forum for users of volatility products and equity derivatives. It is *the* conference for financial professionals to attend to learn the latest risk management tools and tactics from top traders and strategists. 

The next CBOE Risk Management Conference is scheduled for March 4-6 in Carlsbad, California. The agenda is now set with talks from over two dozen industry experts, exploring the latest products, trading strategies and tactics used to manage risk exposure and enhance yields. The full agenda is available here.

As an added bonus, attendees at the March 4-6, 2015 session are able to get a 30% discount* on their first three months of a Trading Volatility+ subscription. 

Our Trading Volatility+ service provides access to:

• Our full suite of volatility metrics and indicators to bring you valuable insight into the movement of VIX ETPs, 
• Our strategies, which utilize variations on widely-used trading indicators (such as Volatility Risk Premium) as well as our own proprietary algorithms (VXX Bias^TM and ZIV Bias^TM),
• Our automated alerts which notify subscribers whenever one of our indicators experiences a critical change in direction, making the strategies easy to follow,
• Our members' forum where you can interact and share ideas with other volatility traders. 

The unique characteristics and profit potential of VIX futures led to the fifth consecutive annual trading volume record in 2014. 2015 is already looking to break that record again as interest in volatility as a tradable asset continues to grow. If you're still shying away from this well-kept secret of sophisticated investors, now is is the time to learn more. A good place to start is with our concise (and FREE!) e-book, Fundamental Concepts and Strategies for Trading Volatility ETPs.

*Discount available only to new subscribers. The discount will be refunded to subscribers after providing proof of event attendance.

VXX & ZIV Bias Indicators - October 2014 Performance Update

Th U.S. Stock market experienced a wild October, with the S&P 500 falling 9.8% from its peak on September 19 to a low on October 15, followed by a two week rally back to all-time highs. This extreme move was matched with a +170% gain in VIX as it rose to a three-year high of 31.06. Highlighting the swiftness of this move, VIX gained more than 10% on three consecutive days for the second time ever. Then, just as swiftly, it retreated with an unprecedented decline of -10% on three consecutive days.

Our Daily Bias indicators read these moves well and produced two great trades. A change to a positive VXX Bias signaled a buy in VXX on September 18 and a change to a negative VXX Bias on October 21 signaled a VXX sell for a gain of 21%. The move to a negative VXX Bias on 10/21 signaled time to move back to short volatility by buying XIV, a trade that is +7% as of October 31. Both of these trades helped us continue our quest to once again outperform the market this year.

Looking at year-to-date performance of the two VXX Bias strategies through October 31:
- Negative VXX Bias strategy: +21% vs +2% for XIV
- Positive VXX Bias strategy:  -5% vs -28% for VXX

Extending the performance time frame of the Negative VXX Bias strategy back to 2012:
- Negative VXX Bias strategy: +566% vs +411% for XIV

Turning attention to ZIV, the Positive ZIV Bias strategy was +1.3% in October bringing the YTD total to +4.8%.

Over the longer time frame back through 2011:
 - Positive ZIV Bias strategy: +391% vs 256% for ZIV.

Performance Data files: 
- VXX Bias: 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014
                - 2012-2014 (multi-year)

- ZIV Bias: 2011-2014 (multi-year)


------------
Hypothetical and Simulated Performance Disclaimer
The 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. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

Objective Signals For Trading VXX, UVXY, and XIV

The market made an impressive run in May with the S&P 500 hitting new all-time highs at 1955.55 and the VIX touching 10.73. With each passing day during this run it seemed there was yet another article claiming that the market is too high or the VIX too low. With actual volatility of the S&P 500 over the past month just 6.42, a VIX in the 10-12 range makes some sense. But rather than speculate on where the VIX should be, the more profitable question is how to trade the volatility ETPs at these levels.

It's dangerous for investors to speculate on where the market will go next without a solid set of objective tools to guide decision making. At Trading Volatility we rely on our proprietary Bias and Spike Risk indicators to provide us with objective information about the likely direction and momentum of volatility ETPs such as VXX, UVXY, TVIX, XIV, SVXY and ZIV.  The daily signals from our indicators make it possible to substantially outperform the market and today I'll provide a closer look at these signals.

VXX Bias Forecast
After the close on each market day our algorithms generate the Bias and Spike Risk forecasts for the following day and publish the data on our Daily Forecast page. We track all of our forecasts and compare the values to the actual movement of VXX, as shown in the graph of our forecasts over the past six months, below.

Here I've highlighted two distinct periods. The first is from Jan 24th to April 28, a three-month period in which the VXX Bias forecast (the blue line, using the left axis) stayed slightly negative with a handful of moves to a positive Bias. This block of forecasts provides us with an indication that there is no real advantage in shorting VXX (or buying the inverse, XIV) given that there is no directional Bias to help us in our trade. While VXX (red line, using the right axis) did see some price spikes during this time, they were short-lived as the Bias failed to remain positive.

Looking at the second period from April 29 to June 11, the VXX Bias was more solidly negative with Bias reading between -1 and -2. These readings told us that the wind was at our back to short VXX (or buy XIV) as VXX fell over 25% during this time. As of the evening of June 11, the VXX Bias jumped back up toward zero remaining just slightly negative, to once again let us know that it is time to be a bit cautious shorting volatility.


VXX Spike Risk Forecast
The VXX Spike Risk forecast provides us with information on the probability of a VXX spike (for our purposes, a "spike" is defined as a move of 7% or more over the next two trading days). As with the VXX Bias, we track our daily Spike Risk forecasts against the percent change of VXX for each day. The graph below captures forecasts vs actuals for the last six months.

We've only seen one period of sustained VXX Spike Risk (blue line, using the left axis) above 50%, which took place in late January/early February when we saw the big upward +30% move in VXX.  Other than that we've only seen a handful of forecasts reaching above 40%. Looking at the recent period from 4/22 to 6/10 you can see a string of low Spike Risk forecasts below 28% and as low as 16%, indicating time to be a bit more aggressive in shorting VXX. This worked out very well as the price of VXX fell on almost every day during this period (red line, using the right axis). For June 12 we saw a Spike Risk of 49% on a day when VXX gained 6.5% intraday, and today's forecast (June 16) was back up to 48%, once again indicating that we need to be more cautious.


The market provides subtle clues for what the it might do next. As you have now seen, we incorporate these clues into our algorithms to generate what we believe are the best indicators available. If you find yourself struggling in this market check us out. To learn more visit our Subscribe page or drop us a line via the Contact page.

The Quest To Outperform The Market

Chances are, if you're an active trader in this market you are struggling to make money. In reality it's a tough game, one in which hedge funds and mutual funds constantly underperform the market.  In 2012, 88% of hedge funds and 65% of mutual funds underperformed the S&P 500 benchmark. In 2013, the hedge fund average trailed the S&P 500 for the fifth straight year with a 7.4% return, 23 percentage points below the S&P 500.

Why do so many professionals and individual investors lose money? Because in order to be successful in trading you need both a good plan and the discipline to execute against the plan. Without both of these a trader will fail to make money consistently.

While we can't really help you with the discipline, we can help you with the plan. We focus most on trading two securities, VXX (the "volatility futures fund") and XIV (the "inverse volatility futures fund"), based on the direction of the fund's built-in Bias. The Bias is our proprietary way of measuring the current directional force on the fund and is primarily based on the price structure of VIX futures and the internal mechanisms that the funds use to manage their holdings. As these values change each day we measure and report on the Biases in our Daily Forecasts so that we know both their direction and magnitude.

With that information, we apply the simple strategy of buying XIV when the VXX Bias is negative, or buying VXX when the VXX Bias is positive. Trading in the direction of the Bias is critical since it can impact the price of the fund by as much as 10% per week. Trading in the direction of the Bias allows traders to take advantage of the funds structure and can provide an edge in trading.

Over the past couple years, XIV has become a popular fund to own with annual returns of 142% and 85% in 2012 and 2013, respectively. But this is not a fund to buy and hold since it is prone to 80%+ losses if the Bias reverses (see XIV: When a "Sure Thing" Goes Bad). You can see in the table below that while the average annual return of XIV is 46%*, it experienced several ugly years when there was an unfavorable Bias. Rather than suffer through these losses, XIV can be sold whenever the VXX Bias is positive to help reduce drawdowns. This "Negative VXX Bias" strategy has been shown to substantially outperform XIV in 6 of the past 8 years, with an average excess performance of 48 percentage points (far right column, below).

% Gain / Loss By Year
Year	XIV	"Negative VXX Bias" Strategy	"Positive VXX Bias" Strategy	Excess performance over XIV using "Negative VXX Bias"
2006	73%	60%	-15%	-13%
2007	-51%	-34%	13%	17%
2008	-71%	-8%	128%	63%
2009	103%	116%	-9%	13%
2010	135%	284%	42%	149%
2011	-47%	45%	61%	92%
2012	142%	216%	11%	74%
2013	85%	74%	-30%	-11%
Average	46%	94%	25%	48%

A look at each year's performance of the "Negative VXX Bias" strategy shows that while it is still vulnerable to losses, overall the strategy has done exceedingly well compared to the alternatives. A comparison of the annual returns of XIV vs the "Negative VXX Bias" strategy is better visualized below.

You can get a feel for how the strategy performs on a day-to-day basis by looking at the each of the performance data files (**links located at the bottom of this post). In these files you can view a graph of the daily value of a portfolio employing each strategy. The chart below compares the "Negative VXX Bias" strategy to XIV during 2011. Note the flat blue line which illustrates that XIV was not owned in the "Negative VXX Bias" strategy during the time XIV experienced steep losses because there was a positive VXX Bias.

The performance data files also contain the forecast VXX Bias values, entry and exit points, and gain/loss data including a histogram of trades. Below is a summary of trades each year for the "Negative VXX Bias" strategy.

Number Of Trades Per Year For Negative VXX Bias Strategy
Year	# of Trades	Winners	Losers	Avg Trade Gain/Loss
2006	12	6	6	4.94%
2007	14	5	9	-2.43%
2008	13	7	6	-0.33%
2009	11	6	5	8.05%
2010	7	5	3	23.34%
2011	10	3	7	4.54%
2012	11	5	6	12.51%
2013	15	8	7	4.27%

Given the size of gains & losses I've discussed so far it should be clear that these strategies typically align with traders who have a relatively high tolerance for risk. They are not for everyone and they are certainly not for anyone who does not pay attention to the changing Bias of the funds. However, if you're a trader who has decided that these types of funds are right for you, we would love to provide you with the tools to assist in your analysis and decision making process.

In addition to tracking these Biases on our website, we can also send email alerts to let subscribers know when the VXX Bias has changed direction. To learn more about the services we provide you can check out our Subscribe page, or drop us a line via the Contact page. You can also chat with us on Twitter at @tradevolatility if you like. We're here to help and answer any questions you might have about the world of volatility!


------------

*Daily prices for VXX and XIV prior to fund inception have been derived from existing VIX futures data. Backtests use each security's 4:00pm ET closing value as an approximated trade price for indicators that require VIX and VIX futures to settle at 4:15pm ET.

**Data files: 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014


------------
Hypothetical and Simulated Performance Disclaimer
The 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. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

VXX Bias Forecast Performance Review, 2014 Year-to-Date

With one third of 2014 now behind us, it's a good time to take a look at year-to-date performance of our Bias strategy. The U.S. stock market has been mixed so far this year (through May 9, 2014) with the S&P 500 index gaining 1.6%,  the Russell 2000 down 4.8%, and the NASDAQ 100 down 1%. The VIX has lost 5.8% YTD although it has seen some wild swings already, gaining 56.3% in early February before returning back to where it started.

At Trading Volatility we focus on trading of VIX ETPs with most attention on VXX and XIV. Today we'll review the year-to-date performance of the VXX Bias forecasts, which are generated after each trading day at 4:30pm ET.
- For those of you who are unfamiliar with our daily Bias forecasts more information can be found on the Daily Forecast page.
- For backtested performance of the Bias strategy dating back to 2006 please see this post.

VXX Bias Indicator Performance, 2014 YTD (Data sheet with trade and performance details)
As usual, we'll review the performance of the indicators in two halves:
1) the "Negative VXX Bias" strategy which involves buying XIV whenever the VXX Bias is negative, and
2) the "Positive VXX Bias" strategy which involves buying VXX whenever the VXX Bias is positive.

1) Negative VXX Bias Strategy
The VXX Bias forecasts are designed to help traders identify the direction and magnitude of any headwinds/tailwinds in VXX and XIV that arise from the structure and momentum of the underlying VIX futures securities. So far this year the Bias forecasts have identified a key change in market structure in early January to give traders a chance to exit positions in XIV before the full 29% drawdown (see graph below). Confident investors sparked a stock market rebound to keep that drawdown contained, but we've seen a mostly sideways/choppy market with a neutral VXX Bias for the majority of the year. Long-time readers of our posts will know that a neutral Bias makes for little or no trading edge in VIX ETPs, making for a more difficult trading environment. However, in late April & early May we've seen the VXX Bias grow more negative and exit the neutral zone to drive new lows in VXX and drive price higher in XIV.
- As of May 9, XIV has returned 0% YTD vs +3% with the Negative VXX Bias strategy.

2) Positive VXX Bias Strategy
We've seen several moves to a positive VXX Bias this year but only one instance has lasted more than a handful of days. In the January instance the VXX Bias remained positive for 13 days, with VXX gaining over 30% before finally closing out a 10.8% gain. Most of the remaining VXX trades have ended with small losses in typical VXX behavior. 2014 has once again demonstrated that while VXX can see good short-term gains, they tend to be fleeting when the Bias quickly returns to negative.

------------
Hypothetical and Simulated Performance Disclaimer
TThe 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. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

2014: Is It Still Profitable To Be Short VXX?

The markets are off to a bit of a rocky start to the year, particularly in the last couple of weeks. This is a distinct change of pace after a rather quiet end to 2013. VXX is +6.84% YTD after hitting a high of +30% on Wednesday. Will VXX see another year like 2012 and 2013 with losses of 60%? Or are we likely to see performance closer to 2011?

In this post I'll cover:

• VIX Technical Review
• Forecast Review
• Trading Outlook
• Trading Plan

VIX Technical Review 

VIX broke out above its 200SMA (14.4) on Jan 24 to start a rally that peaked at 21.48 seven days later. Since then it has quickly retreated and is approaching the 200SMA (now at 14.57) from the other direction. There are some other notable moving averages in the 14.4-14.9 area including the 100SMA, 50SMA, 60EMA, 90EMA and the lower envelope of the 10-2 Bollinger Band, as well as support levels established by previous VIX spikes. This suggests another 5% downside in VIX before support.

Taking a look at VIX futures (chart below), we went into backwardation for a day on Jan 24 and returned for six more days from Jan 30 through Feb 6. This was the longest string of backwardation we've seen since the the Aug 2011 selloff. The impact that backwardation and rising VIX futures have on the price movement of VIX ETF was made clear as XIV fell 30% from its Jan 22 close to its Feb 5 low. Although XIV has recovered somewhat and is down "only" 17% from Jan 22, it is still at risk for further declines should we see a move back to backwardation (also see "XIV: When a 'Sure Thing' Goes Bad").

This was a relatively mild volatility spike with VIX reaching just beyond its long term average of 19.8. Should this move in VIX continue to be more than just a blip on the radar, XIV could see some major losses. We're now back in a slight contango after Friday with Feb at 15.47 and March at 15.88. Feb VIX futures are 1% above spot VIX, which is a very small premium with six trading days left before Feb VIX futures expire. Typically you can expect VIX and expiring VIX futures to remain pretty well coupled as we approach expiration.

Forecast Review

With the expectation for a more dynamic market in 2014, we've been using the signals from our WRY-10SMA indicator in addition to our Bias forecasting signals to guide us in trading. This provides us with additional signals to help avoid short-term drawdowns. After a choppy and sideways January we saw a move in the VXX Weekly Roll Yield above its 10SMA on January 23rd. Combining this with a confirming MACD signal in the VIX on that same day, we went long VXX, selling a potion on the 24th and the remainder on the 27th to lock in 11% gains. This turned out to be premature as the WRY stayed above its 10SMA for 7 more days and an additional 19% gain in VXX, but I find it's always good to take profits in VXX before they disappear. (Note: we will soon be updating our WRY-10SMA indicator to reduce the amount of signal noise by utilizing exponential moving averages.)

Looking at our Bias forecast over the past six months, the negative bias on VXX has been trending smaller resulting in a more difficult short of VXX.

Our VXX Spike Risk forecasts showed a substantially elevated risk over the last few of weeks rising from 25% up to 70%.

Trading Outlook 

First and foremost, let's respect the fact that the market is moving higher, the VXX bias is back to negative, and the VXX WRY is below its 10SMA. Follow this trend and see how we do with the various levels of resistance in the S&P 500 next week (1810 and 1820). Let's also respect the fact that XIV dropped 30% on a modest 5% pullback of the S&P. We are in a relatively old bull market which is rather complacent and investors are heavily leveraged while shorting volatility is a crowded market. We don't yet know if the emerging market issues from the past 2 weeks were just noise or the start of a real problem. When we hit a real problem somewhere down the line VIX will spike quickly and severely and I, for one, don't want to be heavy on the wrong side of the trade when it does.

Trading Plan

Please login to the Members' Forum to finish reading this article. If you're not yet a member you can join via the Subscribe page.

2013 Performance Report - Part 2

In my previous post I covered the year-end performance of the "WRY-10SMA" strategy, which is designed for the more active trader, typically requiring roughly 2-3 dozen trades per year. Today I'll go over the performance of our "Bias" strategies for both VXX and ZIV, as given by our Daily Forecasts.

1) ZIV Bias
We start with ZIV, which couldn't be any more straight forward. Our forecasted Bias for ZIV has been positive since Nov 21, 2011, which was the buy signal.

ZIV performance in 2013: +63% 

2) VXX Bias
The VXX Bias is a bit more dynamic than ZIV Bias, but is still designed for investors who prefer to make trades less frequently. Because some traders prefer to only invest in inverse volatility (XIV) while staying away from long volatility (VXX), I will once again evaluate the performance of this strategy as two halves: the "Negative VXX Bias" in which you short VXX (or buy XIV), and the "Positive VXX Bias" in which you buy VXX.

2a) Negative VXX Bias
The biggest advantage of using the Negative VXX Bias strategy is that it allows traders to take advantage of the bias in XIV when it is available and keeps you out of the trade when the bias is against you. This is most clearly illustrated in the performance going back to 2009 (2009-2013 performance data located here).

Cumulative Return Jan 30, 2009 - Dec 31, 2013
XIV: +1,636%
"Negative VXX Bias": +2,383%

*Note: Results assume that gains are reinvested; prior to inception of XIV the inverse daily return of VXX is used to calculate the daily closing price of XIV.

While this strategy is prone to larger drawdowns than the "WRY<10SMA" strategy, the long term results have made it worthwhile (WRY<10SMA returned 1870% over this same 5 year timeframe).

However, in 2013 the Negative VXX Bias strategy had less remarkable results. "Taper talk" and Congressional games of debt ceiling chicken took our Bias readings briefly to the edge of the positive side and gave the signal to close out positions at rather unfortunate times. Results below (2013 performance data available here).

Cumulative Return Jan 1, 2013 - Dec 31, 2013

XIV: +107% 

"Negative VXX Bias": +53%

"Negative VXX Bias" Trade Summary, 2013

• # of Gains: 5
• # of Losses: 2
• Avg Return: +7.3%
• Max Gain: +24.2%
• Max Loss: -21.2%

Trade histogram of gains & losses for "Negative VXX Bias" in 2013:

2b) Positive VXX Bias

We saw a handful of trades for the "Positive VXX Bias" strategy in 2013, however as mentioned in the previous section, these trades were brief and reversed quickly. You can probably see why many traders choose to just avoid buying VXX. 

Cumulative Return Jan 1, 2013 - Dec 31, 2013

XIV: +107% 

"Positive VXX Bias": -30%

"Positive VXX Bias" Trade Summary, 2013

• # of Gains: 0
• # of Losses: 6
• Avg Return: -9.2%
• Max Gain: -2.5%
• Max Loss: -20.3%

Trade histogram of gains & losses for "Positive VXX Bias" in 2013:

That wraps up the 2013 performance review. If you have any questions or comments feel free to comment below or talk to us directly via the Contact page. 


------------
Hypothetical and Simulated Performance Disclaimer
The 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. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.