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 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.

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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

Day Pass Memberships Now Available for $5

We understand that there are investors who don't have the need for a continuous monthly subscription. For some, the timing for buying and selling volatility ETFs is limited to particular moments where they see an opportunity arise and they are ready to make a trade. Other people just want to access to our set of volatility metrics on occasion when they perceive the market to be at a potential turning point.

I am pleased to announce that you can now purchase a Day Pass to Trading Volatility+ to gain full access to our members-only site at http://members.tradingvolatility.net/ on a non-recurring basis..

Day Passes will provide you with access to:
- The members' Daily Forecast page --  See the current day's indicators as well as the next day's indicators (after 4:33pm ET).
- The members' Intraday Indicators page -- View the indicator values as they update live during regular trading hours.
- Automated change alerts -- Receive an email if there is a buy/sell alert.

Day passes are available at our Subscribe page, with the option to purchase access for 1, 2, 3, 4, or 5 consecutive days (for which the market is open). Each Day Pass is valid from the time it is activated until 11:59pm ET.

Day Passes can be purchased for as low as $4/day**.

For those who may not be familiar with our services, we have offered subscribers a set of buy/sell indicators for volatility ETFs since 2013. Our superior returns were frequently hard to believe so we started having our performance tracked by a third party in 2016.

For more on how our indicators work and can be used, please see our Strategy page. Should you have any questions feel free to reach out to us via our Contact page.


**Pricing for day passes and monthly subscriptions is subject to change.

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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. 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.

Market Crash Protection

The VXX ETF often gets a bad rap. Throughout this bull market of the past ten years it has seemingly only declined.

But VXX is actually an incredibly useful security to own when equities decline. Consider:

- In February 2018, VXX gained 44% (measured month start to end)
- In Octiober 2018, VXX gained 40%  (measured month start to end)
- In December 2018, VXX gained 36% (measured month start to end)

At this point you have to consider whether a decade-long trend is changing. Take a look at the price of VXX over the past two years:

Obviously there is significant movement in VXX and the key to making money off it is to have the ability to time entries and exits well. Enter our VXX Bias indicator...

Our VXX Bias indicator was first made publicly available in 2013 and has been tracked by a third party (Collective2) since 2016.

A snapshot of our results over that time (below) shows a gain of 348%, thanks largely to huge gains in VXX during the months where equities declined heavily. Specifically:

• February 2018 (+36%), 
• October 2018 (+28%), 
• December 2018 (+21%).

But our strategy doesn't just excel when the equity market does poorly. That's because our VXX Bias signals when to buy VXX as well as when to short VXX. It successfully identifies times when the market is strong and it is appropriate to short VXX (or buy the inverse ETF, ticker SVXY).

Equally significant gains are made by shorting volatility. Specifically:

• March 2016 (+25%), 
• May 2016, (+20%), 
• June 2016 (+34%), 
• January 2017 (+30%)

I wouldn't fault you for being skeptical of these results since they are outside the norm of what people are told is possible. Which is exactly the reason why I wanted to have the results tracked by a third party over three years ago. People like see actual trades and results. Our customers now include DIYers, Financial Advisors, and hedge funds.

If you look closely at the monthly returns you'll see that we also have months where the strategy does poorly. It should come as no surprise to you that trading is difficult and there is no strategy that works in all market conditions. We typically find ourselves struggling through choppy markets and sharp reversals. We do take losses, for this is not a magic money machine. Fortunately these episodes are relatively brief and our indicator is tuned to maximize profits over the long term.

It has been my honor to have helped thousands of subscribers over the past 6 years. From my initial post in Dec 2012 my mission has been to help investors navigate the use of volatility ETPs and enhance their portfolio returns. We look forward to helping others who can benefit from our expertise.

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.

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 on Collective2.

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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. 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.

Professional Volatility Strategies

Six years ago on this blog I wrote "XIV: When A "Sure Thing" Goes Bad, highlighting that the key drivers of Volatility ETPs are 1) the change in price of the relevant VIX futures contracts and 2) the term structure. While XIV no longer exists after last year's blow up, the message is still relevant to XIV's reduced leverage replacement, SVXY. In fact, an alternate title for this post could be "When a "Sure Thing" Goes Bad -- SVXY Edition"

Similar to XIV, SVXY is a fund that can be used as a play when an investor believes that volatility will decline. Although SVXY has only half the leverage that XIV had (-0.5x vs -1x), it can still produce strong gains and losses.

Below is a chart of the price of SVXY calculated as if it had the -0.5x leverage since 2004 (prices prior to the fund's official leverage reduction have been constructed by calculating the index value using 1st and 2nd month VIX futures data).

I've highlighted most of the larger price drops to help illustrate that SVXY is not a buy-and-hold security, even in its reduced leverage form. When the market structure changed in 2007 & 2008, SVXY still lost 70% of its value due to strong backwardation in VIX Futures.

As long-time readers know, the term structure of VIX futures is what drives various VIX funds, including SVXY, VXXB, UVXY, TVIX, VIXY, VIIX, and ZIV.

SVXY performs best in years where there is a strong and persistent contango, the condition where VIX is lower than VIX futures. The best way to measure the degree of contango for these products is to look at the weighted value of first and second month VIX futures as compared to spot VIX. Below is a graph of the weighted VIX futures values to spot VIX over the past 11 years.

The trendline here provides a way to filter out the daily noise and allows us to verify that the years in which SVXY performed the best experienced the largest and most persistent contango. On the flip side, the time frames that SVXY performed badly experienced backwardation and/or a small contango.

The fact that the term structure is such a strong driver of VIX ETPs is why professionals track this data closely. We track VIX Futures data and associated metrics shown on our website and use information from the term structure, price momentum, historical volatility, and the volatility of the VIX as inputs to our automated algorithms for buying and selling. The algorithm values are then used to trigger automated buying and selling of VIX ETPs and are emailed to subscribers. We track this data intraday as well and post it to both our Intraday Indicators page as well as our Daily Forecast page.

Our results (as tracked by a third party) substantially beat the S&P 500 over the long term. A screenshot of the VXX Bias and VRP+VXX Bias since we began tracking them on Collective2 are shown below:


VXX Bias:

VRP+VXX Bias ("Trading Volatility 1"):

Over the long term our approach can do well in both bull and bear markets, as seen in by our hypothetical backtest summary.

Clearly not all years are huge winners but the data shows that the use of the term structure data tends to be extremely valuable. If you are interested in checking out what we offer to subscribers you can view our Subscribe page.

One more note: We made a change to our VRP indicator in January 2019 so that it can now be used as a standalone strategy. As such, I am now having Collective2 track that as well. It can be found under Enhanced VRP.


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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. 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,  VXXB, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

Fidelity Lifts Restrictions On SVXY

After prohibiting SVXY as part of fallout from the XIV blow up last year, Fidelity is now allowing people to purchase inverse volatility funds provided they complete a one-time Investment Disclosure.

After attempting to place the order, you will need to read their disclosure and check a box to indicate that you agree. 

After that you can trade SVXY there as before in either retirement or cash accounts.

Other brokers have lifted restrictions as well so it may be worth checking yours as well if you previously faced issues with inverse volatility ETNs.

Market Trends Point To Another Year of Volatility in 2019

Navigating the stock market in 2017 was easy. Shorting volatility was easy money. Picking individual stocks was easy and everyone was a brilliant strategist.

Then came 2018. The graph below highlights the fact that while less than 2% of assets were negative in 2017, 90% of assets are negative YTD in 2018 -- they highest percentage since... ever.

In another stark contrast to 2017, the short volatility ETPs have lost over 90% of their value in 2018 thanks to February's historic volatility spike. Last year's buy-and-hold everything strategy has been a bust across the board in 2018.

One of the few assets that lost in 2017 was volatility. Unsurprisingly, volatility has been one of the few bright spots in 2018 with the VIX index gaining +74% YTD and VXX +32% YTD.

What sort of market trends appear to be happening now and on tap for 2019?
 - decelerating corporate earnings [now]
 - late stages of the corporate debt cycle [now]
 - decline of demand for U.S. Treasuries [now]
 - quantitative tightening [now]
 - slowing global growth [now]
 - trend of de-dollarization [now]
 - eventual reverse to more quantitative easing [late 2019]

That's a recipe for another difficult year for a range of assets with a strong possibility of wide movements within the equity markets as the year progresses. As we stated three years ago, traders need data-driven, reliable, observable, and easy-to-follow trading rules in order to set themselves up for consistent success. One of the reasons that 90% of people fail to make money at trading is they fail to have a process-oriented trading plan. As the saying goes, "Plan the trade. Trade the plan."

We think that volatility will again be a major factor within the markets in 2019. Our playbook to make money on short-term investing opportunities is to maintain a quantitative-driven investment process for volatility ETPs that has made us successful for the past 7+ years. Specifically, our VXX Bias and VRP indicators.

Why? Because they perform exceedingly well over the long term by trading both long volatility using VXX (soon to be replaced by VXXB) and short volatility using SVXY (previously using XIV).

We've previously noted that 2018 has given us trouble and that hasn't changed much since July. Our automated trading performance as tracked by a third party now stands at -22% for VRP+VXX Bias and +33% for VXX Bias. While the year is not yet over, those numbers are lagging average performance in most years. However, when the average annual return is north of 50% per year under a range of varying market conditions with best performance occurring during market drawdowns, it makes sense to stick with a good thing.

We take the guesswork out of the investing equation with a solid set of objective tools to guide decision making. At Trading Volatility our algorithms conduct daily monitoring of a variety of volatility-related data to generate our VXX Bias and VRP indicators which provide us with objective information about the likely direction of volatility ETPs, including VXX, VXXB, UVXY, TVIX, SVXY and ZIV.

Our algorithms continuously measure market data throughout each trading day and publish results on our subscribers' Intraday Indicator page. Our automation also emails and publishes the indicators' final values at the end of each day so that subscribers' can track the indicator of their choosing and act accordingly.

If you find yourself struggling in this market check us out. Stop guessing what will happen and sign up for our daily data-driven indicators for volatility ETPs.  To learn more visit our Strategy page and Subscribe page or drop us a line via the Contact page.

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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. 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, VXXB, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

Our Indicators Performance Update - YTD Through July 2018

After a strong 2016 (+96%) and 2017 (+126%), our performance in 2018 has been rather lackluster so far.

The biggest difference between this year and previous years is that the short volatility trade isn't working well. We've generally seen small roll yields, choppy market conditions with strong whipsaw reversals, and a VIX that closed the first day of the year with a record low close of 9.77 (47% below the median close on the first day of the year). As you can see in the graph below, the short volatility trade (via buying SVXY) has generally contributed between plus and minus 10% to performance of both indicators all year.

The long volatility trades (via buying VXX) helped the performance for the VXX Bias with YTD returns briefly exceeding 100% after February's historical VIX spike. Despite the initial success however, both VRP+VXX Bias and VXX Bias indicators gave back most of their long volatility gains after February, as shown in the graph below.

Putting both the long and short volatility trades together for 2018 we arrive at the following YTD performance (through July):

• VRP+VXX Bias: -19%
• VXX Bias: +37%
• VRP: -93%
• SVXY (buy and hold): -89%

This year's journey can be viewed in the equity curves below:

As we did during 2016 and 2017, we continue to send our automated trade alerts to Collective2's auto-trading platform. Below is how our indicators performed, as tracked by Collective2 (performance values and graphs here date back to launch in February 2016).1

Overall, I've been very happy with how the indicators have performed since they were launched on our website back in 2013, but this year has certainly been slow so far -- especially over the last four months. 

As usual, I've updated the values for monthly returns and they have been updated on our Strategy page, as well as below.

Note: Trading Volatility+ subscribers have access to our VRP and VXX Bias indicators, our intraday indicator data, receive emails with preliminary and final change alerts for each of the indicators as well as our daily summaries, and interact with our private community of volatility traders in the forum. If interested, you can learn more about our services on our Subscribe page.

As always, each day's indicator values, buy/sell triggers, trade performance summary, and equity curves are tracked in the spreadsheets linked at the bottom of our Subscribe page. Additional information on our trading strategy and indicators can be found on our Strategy page.

1Note: As mentioned in our previous post, you will find differences between the ideal/hypothetical indicator performance and actual trading performance for the following reasons:
- The VRP+VXX Bias indicator ("Trading Volatility 1" on C2) was launched on C2 on Feb 2, 2016.
- The VXX Bias indicator was launched on C2 on Feb 19, 2016
- Both C2 systems traded only 72%-80% of portfolio equity until April 1. After April 1, both C2 systems trade at ~97.5% portfolio equity (the ideal/hypothetical model portfolios trade at 100% equity).
- The ideal/hypothetical performance does not account for trade commissions or subscriptions costs.

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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. 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.

SVXY and UVXY To Be Re-Purposed Feb 28

Another big news item dropped in the volatility ETP world today. This one from ProShares, who is reducing target exposure for SVXY and UVXY.

Effective 2/28/18:

$SVXY will be a -0.5x volatility fund (previously -1x)

$UVXY will be a 1.5x volatility fund (previously 2x)

This is a similar move to what VMIN & VMAX announced earlier Monday. But while VMIN/VMAX kept their exposure at 1x and moved the duration of VIX futures out ~60 days, SVXY is just reducing its daily movement by half.

As I mentioned in my other post today, this is a more sensible way for a short volatility play. My main gripe is that SVXY went all the way down to -0.5x instead of something like -0.75. The reduced daily movement makes SVXY less attractive as the short vol ETP of choice, but it's nice that you can still buy options against it.

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ProShare Capital Management LLC Plans to Reduce Target Exposure On Two ETFs

Bethesda, MD (February 26, 2018) – ProShare Capital Management today announced that the investment objective of two of its ETFs will change effective as of close of business on February 27, 2018.

ProShares Ultra VIX Short-Term Futures ETF (NYSE Arca: UVXY) will change its investment objective to seek results (before fees and expenses) that correspond to one and one-half times (1.5x) the performance of the S&P 500 VIX Short-Term Futures Index ("Index") for a single day. The Fund's investment objective currently is to seek results (before fees and expenses) that correspond to two times (2x) the performance of the Index for a single day. If the Fund were successful in meeting its new objective, on a day the Index rose 1%, the Fund should rise approximately 1.5%, before fees and expenses. Similarly, on a day the Index fell 1%, the Fund should fall approximately 1.5%, before fees and expenses.

ProShares Short VIX Short-Term Futures ETF (NYSE Arca: SVXY) will change its investment objective to seek results (before fees and expenses) that correspond to one-half the inverse (-0.5x) of the Index for a single day. The Fund's investment objective currently is to seek results (before fees and expenses) that correspond to the inverse (-1x) of the Index for a single day. If the Fund were successful in meeting its new objective, on a day the Index fell 1%, the Fund should rise approximately 0.5%, before fees and expenses. Similarly, on a day the Index rose 1%, the Fund should fall approximately 0.5%, before fees and expenses.

Certain regulatory approvals will be required for the Funds to permanently pursue these new investment objectives. In the event that such approvals are not obtained, the Funds will consider other courses of action.

XIV Is No More

Market action on Monday this week resulted in the all-time record for a 1-day spike in VIX at 115.6%. This also caused our beloved XIV to implode and alas, it no longer exists.

SVXY, a nearly identical product managed by ProShares, managed to survive the carnage although it lost most of its value. Other inverse volatility products including ZIV, VMIN, and XIVH are still around as well. We plan to move to SVXY and continue business as usual.

Speaking of business as usual, below is our performance of our indicators through Feb 8, 2018, as auto-traded on Collective2:

Our Indicator Performance: +82% YTD Through November

It is time again for a year-to-date performance update of our indicators.

First, we have the hypothetical results using the daily indicators values in our model simulations (using ~100% equity on trades and assuming zero trade commissions). Here is the daily equity curve of all indicators, compared to XIV (buy-and-hold):

As you can see, the YTD performance of our indicators using hypothetical models has come down a bit since our update in July and subsequent peak on September 7th. Despite this lull, 2016 has been a very good year for us. Through November, the performance now sits at:
- VRP+VXX Bias: +82%
- VXX Bias: +122%
- VRP: +7%

For reference, 2016 performance of the publicly-traded "short volatility ETN" (ticker: XIV) and the "long volatility ETF" (ticker: VXX) are at:
- XIV (buy and hold): +69%
- VXX (buy and hold): -65%


Auto-Trade Performance on Collective2
We have tracked our actual trades and performance on Collective2's site since February 2016 (links: VRP+VXX Bias & VXX Bias). Our VRP+VXX Bias and VXX Bias indicators and both 100% automated algorithms which send signals to Collective2's platform for auto-trade execution in our trading account and performance tracking.¹

From launch (February 2016) through November, performance on the auto-trade systems sit at:

- VRP+VXX Bias: +65%
- VXX Bias: +83%
- VRP: (not auto-traded)

As of last week, the current cumulative returns for our strategies auto-traded on Collective2 will be updated daily on our Strategy Page.

Compared to the indicators' historical record, 2016 is currently sitting around average for the year. Also posted on our Strategy Page, we have the monthly and annualized statistics for each of our strategies compared to XIV (buy-and-hold):


Trading Volatility+ subscribers have access to our VRP and VXX Bias indicators, our intraday indicator data, receive emails with preliminary and final change alerts for each of the indicators as well as our daily summaries, and interact with our private community of volatility traders in the forum. If interested, you can learn more about our services on our Subscribe page.

As always, each day's indicator values, buy/sell triggers, trade performance summary, and equity curves are tracked in the spreadsheets linked at the bottom of our Subscribe page. Additional information on our trading strategy and indicators can be found on our Strategy page.




¹Note: As mentioned in our previous post, you will find differences between the ideal/hypothetical indicator performance and actual trading performance for the following reasons:
- The VRP+VXX Bias indicator ("Trading Volatility 1" on C2) was launched on C2 on Feb 2, 2016.
- The VXX Bias indicator was launched on C2 on Feb 19, 2016
- Both C2 systems traded only 72%-80% of portfolio equity until April 1. After April 1, both C2 systems trade at ~97.5% portfolio equity (the ideal/hypothetical model portfolios trade at 100% equity).
- The ideal/hypothetical performance does not account for trade commissions or subscriptions costs.

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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. 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 XIV, VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

The Most Important Chart For Trading Volatility ETPs

On April 5, 2014 I wrote an article titled Shorting Volatility: Time To Reduce Profit Expectations for 2014 which outlined why I thought it would be difficult for XIV (the fund which tracks the inverse daily return of volatility futures) to finish positive for 2014. When the article was published XIV had returned an impressive +547% over the past 28 months, as shown in the chart below.

Understandably, many people disagreed with my view, yet XIV finished the 2014 year -9%.

Later in 2014 (September) I wrote The End of an Era for the Market, in which I discussed how a choppy market that is no longer a reliable environment for shorting volatility had become the norm as the Fed concluded their QE program. XIV lost 37% of its value over the next four months and is currently down 30% since that post.

If it wasn't already clear, XIV is not a buy and hold security. It has returned -20% over the past year and -7% over the past two years. The environment is not the same as what it was in 2012 and 2013.

How did I make these calls?

Because returns in XIV are heavily dependent on the Weekly Roll Yield (WRY).

A major factor for the lower returns in the past two years comes from a smaller weekly roll yield that is used to propel XIV. The inverse of the XIV WRY is the VXX WRY (which comes from the difference between first and second month VIX futures). We track this important metric on our site, and as you can see in the graph below, the roll yield has moved from -2% to -1% over the past several years and has recently started to move toward 0%.

This is most important graph because the WRY serves as a headwind or tailwind to VIX ETPs. As the WRY approaches zero, trends become less stable and our advantage in trading XIV or VXX diminishes. Conversely, as the WRY moves away from zero trends become stronger.

Right now there is less of a headwind for VXX and less of a tailwind for XIV/SVXY. At this point in our old bull market we are also at high risk for the VXX WRY turning positive, which would give VXX a tailwind and XIV a headwind.

Revisiting our graph which compares the annual returns of XIV to the average Weekly Roll Yield (below), we can see why the WRY is so important.

Looking at the trendline we can see that with a fairly constant 1% WRY, we can generally expect XIV to return ~+25% per year. As the average WRY moves towards 2% we can expect XIV to return ~+120% per year.  At 0%, XIV is likely to return ~-60%. The recent shrinking of the WRY from 2% to 1% has an enormous impact on returns and that's why it is so important. A continued move of the WRY toward 0% or higher would be alarming to investors who plan to buy-and-hold XIV.

Because the WRY is such an important factor in the performance of VIX ETPs, our approach is to trade XIV and VXX using the WRY as a primary input for our VXX Bias and ZIV Bias indicators (our strategies are outlined here). While XIV is negative on the year, our VXX Bias indicator has put forth a performance of +33% YTD.

No credible trader will ever say that trading is easy, and that is doubly true when it comes to volatility. It requires a deep understanding of market forces, a solid process-oriented plan, and discipline in execution. In the current environment it will be more important than ever to stay on top of changing conditions.

We have been in the business of helping traders stay on top of the volatility market for three years now. We look forward to a fourth year of providing a variety of free data services throughout our website and are always happy to answer questions submitted through our Contact page. We also offer subscriber services to people looking for additional data, metrics, automated alerts and daily summaries, and access to a community of volatility traders. If you're interested, don't hesitate to drop us a line.


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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 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.

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!


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*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


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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.