Q3 2017 Strategy Report - Volatility Trading Strategies

Updated: Dec 6, 2018

2017 continues to build into what will no doubt be remembered for decades to come as that year volatility took a vacation.  There’s only been a few other times in history when volatility has remained this persistently low for this long.  Here’s a chart showing the lowest VIX closes since 1990 with 2017 readings marked in blue:

My business is called “Volatility Trading Strategies” so in a year where volatility has been non existent, not surprisingly we’ve struggled a little bit.  Of course we can never choose the market environment though so despite it being very unfavorable to my conservative style of investing, I still have to fight for the best performance possible given the bad situation.  I’m very patient and one thing I won’t do is break my own trading rules and start chasing this market. I designed my strategies through years of testing and live trading and they’ve successfully navigated some difficult times in the past several years.

Nobody and no strategy can perform well all the time so choices and sacrifices need to be made.  Admittedly, I’m not a bull market trader.  I focus on the more difficult times in the markets because I feel those are far more common and important.  Years like 2017 are very few and far between.  In fact they only come around once every decade or two so I don’t mind spending some time on the sidelines if it means we’re a little more prepared for turbulence when it comes.

Our Total Portfolio Solution was down -3.23% for the quarter.

In a year with very little volatility, there were actually a few large VIX spikes in August that were the main culprit for our losses.  On August 10th, 2017 the VIX spiked 44% and a week later on August 17th there was another 32% VIX spike.  Here’s where the two of them rank in the all time VIX spikes  (marked in blue)

Volatility products and the XIV specifically derive their price based off the VIX futures so the VIX Index is not a direct proxy for performance, but it’s close enough.  When the VIX has back to back spikes that rank in the top 20 of all time, that will definitely have an effect on the XIV.  Those two losing days were significant as you can see below  (marked in blue)

My main focus is always risk management and smoothing out performance so we can be here profitable for many years to come, and I’m proud that my strategy has avoided 30 of the 35 worst down days for the XIV.  That is by design.  Preserving our emotional capital by not experiencing many of the drawdowns is vital not only for maximizing profit but also for minimizing emotions along the way.  So we do focus on avoiding losses more than anything else.  However we can’t avoid them all and unfortunately we got caught in back to back losing days in August which was the reason for our negative performance of late.  No excuses, they happened.

Everybody takes trading losses from time to time, but in my opinion one of the most important traits for long term investing success is handling adversity well.  This isn’t the first time I’ve had trading losses and it won’t be the last, but I will handle this the same way I always do.  By remaining patient and disciplined, and focusing solely on risk management.  This was just a small bump in the road.

Trade history for the past quarter for all our strategies

All videos released in Q3 2017.  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.