Q2 2018 Strategy Report - Volatility Trading Strategies

Updated: Dec 6, 2018

I’m going to switch things up a bit and do the strategy commentary first and then below that I’ll highlight a few noteworthy events from this past quarter.

VTS Total Portfolio Solution:

It was another solid quarter for our Total Portfolio Solution coming in right in line with long-term performance numbers.  Of course I’m biased so take with a grain of salt but I think it’s a little better than average for us considering how difficult of an investing environment it’s been in 2018.  Aside from a few tech and energy names pretty much everything is flat or down this year.  Bonds are down.  Gold is down.  Real estate is flat.  Emerging markets are down.  MLPs are down.  Hedge funds are pretty flat.  The fact that the Total Portfolio Solution came in with a 13th of 26 performance quarter shows the importance of reducing overall market correlations and just sticking to our niche investing strategies.  We can make a decent rate of return even when the market gives us very little to work with.  Obviously we prefer stronger trends either up or down, but it’s not the end of the world if markets give us nothing but chop.

VTS Tactical Balanced Strategy:

June marks the 10th straight month of gains for the Tactical Balanced strategy and as always that’s in large part due to our focus on risk management.  We moved to our safety IEF Bond positions five different times this past quarter and all five of those trades were profitable.  I often get asked if we should even be trading bonds given the rising interest rate environment and it’s a very valid question. But remember for us they aren’t intended to be tremendously profitable, just to serve as a potential alternative when the broad markets and specific volatility metrics are showing signs of weakness.  In general I would say it’s true that bonds aren’t a great buy and hold investment right now, but we trade tactically and only enter bonds when there is clear equity risk and it’s paid off for years.  As the old saying goes, if it ain’t broke don’t fix it.  The S&P 500 saw a correction of over 10% during this period, yet the Tactical Balanced Strategy kept it to a minimum and continues to march higher.

VTS Combined Volatility Strategy:

The big news internally for us this past quarter was the re-launch of the VTS Tactical Volatility Strategy.  It’s been on hold for a few months following the termination of the XIV.  Remember we were safely in cash during the February volatility spike but without an underlying ETF to trade it’s been in a holding pattern for a few months.  With the strategy now being executed entirely through a very simple options strategy called stock replacement it’s made it’s triumphant return.

VTS Tactical Volatility Video  /  Stock Replacement part 1   /   Stock Replacement part 2

Our European friends have been struggling with the new MiFID II regulations that in many cases have meant losing access to the US based ETFs and volatility ETPs are included in that.  With stock replacement I’m hopeful the new VTS Tactical Volatility Strategy will again be accessible for them and we can continue our march higher towards achieving our retirement goals.

  • If you’ve been restricted from holding SVXY or ZIV please contact your broker and see if you have access to long only single leg options on the VXX.  If so, feel free to ask me as many questions as you like about how the new stock replacement volatility strategy might fit in to your investment goals.  VolatilityTradingStrategies@hotmail.com

The VTS Conservative Vol Strategy was down -1.19% in June which isn’t really noteworthy at all other than it was the first negative month since August 2017.  That’s 9 straight months of gains for the strategy which tied the longest stretch ever.  The previous record for 9 straight winning months from February through October 2014 saw a cumulative return of 20.5%.  However this latest streak from September 2017 through May 2018 saw a cumulative gain of 28.6%.  Considering the ZIV itself has seen a massive drawdown of over -30% in that same time period and the S&P 500 has been in a drawdown for 6 months and counting now, the fact that we didn’t have a single losing month and a gain of 28.6%, I’m very pleased with the performance of the strategy.

The VTS Aggressive Vol strategy which as the name suggests is more aggressive, taking a higher percentage of trades.  The Tactical Volatility and the Conservative Vol are both active less than 50% of the time, but the Aggressive Vol is active over 70% of the time.  This means it’s more correlated to the underlying volatility products than the other two strategies and there’s always a trade off there.  In good times it can make tremendous returns and it’s high fives all around but when the underlying SVXY struggles the goal of the strategy becomes risk mitigation rather than absolute performance.  It may not look like it but the strategy actually performed it’s job quite well this year losing far less than the benchmark.

The SVXY is down 90% in 2018 but even if we remove the Feb 5th aftermarket volatility disaster it’s still down over 40% in 2018.  Not much to work with there but we substantially reduced the damage and can easily recover.  At the end of the day that’s what matters with vol trading.  Take the performance when you can get it, and reduce the damage when vol bites back.  In the long-run it adds up to success.

VTS Discretionary Strategy:

It’s been a very successful quarter for the strategy both performance wise and attracting a lot of attention to options trading that has previously been an intimidating market for some to enter.  I will continue to tear down that barrier to entry and try to make it as accessible and easy to understand as possible.  Believe me once you get the hang of it you’ll realize how much fun it can be and what a great diversification and risk management tool options trading can be.  I’ll continue teaching if you continue learning and asking questions 

“Give a man a fish and he eats for a day.  Teach a man to fish and he eats for a lifetime.”

Feel free to open a paper trading account through your broker and join us on this options trading journey.  Another internal change which I’m very excited about is the merging of the old VTS Iron Condor Strategy to the new VTS Discretionary Strategy.  I believe it’s not only going to streamline things and make it easier for everybody to follow, but it will also increase the efficient use of capital within the strategy and ultimately boost long-term performance.

The VTS Iron Condor Strategy ended on a high note but going forward we will be executing all Iron Condor specific trades through just the VTS Discretionary Strategy and of course in keeping with the purpose of the strategy I will continue to do full articles and videos for all the trade types so that it also serves as a teaching strategy.

General Market Summary:

The volatility markets continued to display significant healing after that record setting 115% VIX index spike on February 5, 2018. Now the after effects of an event like that will likely linger for several more months but we have started to see a return to more normal volatility levels.

The VIX futures are the most direct reflection of market volatility we have, and the slope of the VIX futures term structure is a significant barometer of market sentiment. VIX futures contango occurs in lower volatility environments when the back month future (M2) price is higher than the front month future (M1) price. This signals that market participants expect further stability in the S&P 500. VIX futures backwardation occurs when the opposite is present. When the front month M1 is higher than the back month M2 which points to short-term elevated volatility and fear.

The first quarter of 2018 was very volatile with contango present on less than 50% of trading days. However the second quarter has seen a marked improvement with contango present 80% of the time, almost in line with the long-term average of 84%.

We saw an interest rate hike again this past June marking the 7th Fed funds rate hike since the financial crisis.  As of right now market participants are pricing in two more rate hikes in 2018 which if you’ve been following my work will know I’m very much a fan of.  I still think the unwinding of the balance sheet has been too slow and I fear the consequences of that will be felt during the next recession when we realize how little ammunition central banks have the next time around, but I’d like to be an optimist and say it’s never too late to make up for old mistakes so let’s just hope for 2 more rate hikes this year and 3-4 more next year.

Trade history for the past quarter for all our strategies

Claim your FREE trial here - Take control of your financial future!

All videos released in Q2 2018.  Please enjoy, and as always questions are always welcome


Want to join the awesome VTS community?

* 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.