Q1 2018 Strategy Report - Volatility Trading Strategies

It’s impossible to write anything for the first quarter of 2018 without everything being about February 5th.  It’s a day that will be remembered forever.  Now for many people volatility investing is still a relatively new thing.  They don’t remember how vol products reacted during the European Debt Crisis in 2011.  They weren’t live trading during the XIV drawdown from nearly 50 to the mid teens in 2015.  For many people February 5, 2018 was the first real scare they experienced in live trading.  Well to all of you, welcome to the thrilling world of volatility investing!

The end result, the XIV was terminated.  RIP my friend, you will be missed.  More on that down below…

VTS Total Portfolio Solution:

It was only a month ago I was writing about how frustrating the low volatility environment in 2017 was and I actually ended our last performance report by asking for higher volatility in 2018.  I’m sorry folks, I didn’t realize I had that kind of power of suggestion.  Let me see if lightning can strike for us twice.  Here’s hoping for 15% a year performance from now until the end of time  (will it work?).  Anyway, take a look at the stark difference in S&P 500 movement this past quarter.  It was boring boring boring for ages and then just like that, somebody flipped the switch.

And it’s amazing how fast the market bears come out of the woodwork when we see action like that.  So many people calling the top now and I’m getting a large influx of questions about whether I think it’s all downhill from here.  Well maybe I’ll make a video about that but honestly what I think doesn’t matter.  I don’t let personal market predictions influence the quantitative strategies.  We just trade what’s in front of us so whether the next recession is right around the corner or several years away, we’ll be ready for whatever the markets give.

VTS Tactical Balanced Strategy:

Let’s ignore February 5th for a minute because the truth is we can never allow a single day to be a standout positive or negative influence on our long-term goals.  I don’t chase big wins and I definitely strive to avoid all big losses, it’s about consistency and the Tactical Balanced Strategy navigated the first quarter of 2018 very well if I do say so myself.  And we accomplish that by smoothing out drawdowns during unstable periods.  Starting January 26th this past quarter has seen the S&P enter correction mode with a drawdown of more than 10%.  Our Balanced Strategy however didn’t really feel much of it as we were mostly in safety positions.

Just for reference here’s a few more charts of our strategy performance during other rough periods for the stock market:

2010 flash crash:

2011 European debt crisis:

2015 China worries / Fed tightening

Can’t win em all but we’ve done a pretty good job avoiding the worst periods and with stocks near all time highs and interest rates starting to rise, my guess is we’ll need some more of this risk management as we move forward into this now 2nd longest bull market in history.  And as of this past week, the VTS Tactical Balanced Strategy will be better than ever as it’s undergone it’s annual “diagnostic.”  I very rarely make changes but with a new year of data points and incredibly low volatility there have been a few.  Please refer to the entire article here to see how these changes would have and will affect the strategy:

VTS Combined Volatility Strategy:

Most of you have probably seen my epic rant about the low volatility environment we saw in 2017.  If you missed it you can check it out here in last quarters performance report.  So…  It happened.

Now did I think we were going to see a massive volatility spike and extended drawdown at some point in the future?  Yes of course, there’s been several 50%+ XIV crashes in the past so of course it was inevitable.  Did I think it was going to happen in a single day?  Well, no.  But I did kinda sorta  (quite often)  say “it could.”

I was called crazy several times publicly for stating my opinion that XIV could potentially terminate and ironically I was actually in a Twitter debate with a dude named Seth on that Monday morning February 5th about this exact topic.  Something he tweeted caught my eye when he mentioned that after a few down days like we saw the previous Thursday and Friday, that it’s one of the best times to short volatility.  Against character and because I thought I was doing a service to my audience I jumped in and said slow down there my friend, it’s actually the worst time to initiate shorts.  We went back and forth in disagreement but my general point was, not often but every now and then volatility begets more volatility and it’s probably best to respect the wave and hang out in safety.  Literally just a few hours later we witnessed what many are calling VOLmageddon or VOLpocalypse.  We’ll leave it there but hopefully most of you had safety in mind and didn’t suffer that badly.

Our strategies were all in cash well ahead of time so in the future looking back on it, it’ll be like it didn’t even happen.  We just move forward and the official record will be none the wiser, aside from the fact that we traders lost the XIV.  I know it may seem trivial to many because there’s plenty of other products out there and likely plenty more new ones on the horizon, but the XIV has been a very big part of my life since I started trading it in early 2011.  A good chunk of the hundreds of articles I’ve written in the last 7 years in some way or another reference XIV directly.  I feel genuine sadness that it’s gone.

XIV from inception on Nov 30th, 2010 through “acceleration / termination” on Feb 21st, 2018.  What a chart!

VTS Discretionary Strategy:

Please enjoy the full video introduction for the VTS Discretionary Strategy and feel free to open up a paper trading account and join in.  I’m always available to answer questions.

Click here for the Strategy video

Trade history for the past quarter for all our strategies

All videos released in Q1 2018.  Please enjoy, and as always questions are always welcome


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* All information, analysis, and articles on this site are provided for informational purposes only. Nothing herein should be interested as personalized investment advice as I make no recommendations to buy, sell, or hold any securities or positions. I'm making this website available "as is" with no warranty or guarantees of it's accuracy, completeness, or current's. If you rely on this website or any of the information contained, you do so entirely at your own risk. I do not hold myself out as a financial advisor and nothing herein is a solicitation for any fund or securities mentioned. Although I may answer general questions about the information herein, I'm not licensed or registered under security laws to address your personal investment situation. Past performance is not indicative of future results. Any and all financial decisions are the sole responsibility of you the individual.