Q1 2014 Strategy Report - Volatility Trading Strategies

Updated: Dec 6, 2018

Stocks got off to a rough start in 2014 following that monster year in 2013, being down over 3% in January.  As we’ve seen time and again though they recovered nicely in February and March.  Due to the nature of the market decline and subsequent recovery our fund spent a higher than normal amount of time in cash this quarter with very few trades.  As always though our primary concern is risk management and there just weren’t many clear trade signals this quarter.  It’s always better to be safely in cash than be allocated in low conviction trades.  One bright spot was the fact that the benchmark XIV was down nearly 17% in January but we were only down 6.5%.

It’s been over a year and a half since the last significant market decline took place back in May of 2012.  After stocks had such a great year in 2013 I fear a lot of traders out there might be getting lulled into thinking holding the XIV is easy money.  I’m starting to notice more and more articles being written and the media is certainly paying more attention to the volatility space which in many ways is a good thing, especially since our fund is performing so well.  However it can also be a bad thing if traders don’t understand how fast things can go south.  

Our trade signals are designed to trigger a move to cash when things start to get dangerous, but I don’t think many of our fellow traders have the same circuit breakers in place.  I cringe to think what’s going to happen when stocks suffer any kind of violent drop.

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