Volatility Trading Strategies - 3 years later

Updated: May 2, 2019

For the better part of 20 years now traditional asset class investing has produced less than stellar returns which led to the introduction of various volatility related products that attempt to turn market volatility itself into a tradable asset class.  It’s a great concept in theory and certainly one with a lot of potential, however these products are very difficult to understand and even harder to trade effectively. When we launched in 2012 there weren’t many trading in this space. Fast forward three years later and it’s becoming fairly commonplace for investors to at least have a little exposure to these products.

Unfortunately the vast majority of people who have attempted to do so have seen alternating periods of exceptional gains mixed in with quick and substantial losses.

I don’t just mean amateur traders either.  Many of our competitors in the volatility space have suffered the same fate.  They see exceptional returns for extended periods of time when the markets cooperate, only to give most of it back during a few of the short but violent volatility spikes we’ve seen in recent years. I won’t call out any of them by name but it won’t take more than a few minutes on Google to find some of the top sites.  You’ve probably noticed some of the more well known ones lost 40 or even 50% during this latest market crash in August 2015, and several others just stopped updating results or closed down entirely.

I hope I’m not the only one to notice the irony here.  These traders claim to profit from turning volatility into a tradable asset class, only to have that exact same market volatility destroy their funds every year or two.  Isn’t that similar to someone claiming to be a great boxer, but only if their opponent doesn’t actually hit back?

Why is this happening, even to experienced traders?  Simply put, they’ve not understood the true nature of volatility and how these products move.  They mined simulated data dating back to 2004 and created binary systems that are either long or short volatility to capitalize on the major moves one way or another, not realizing that it’s the ambiguous middle ground that is the difficult part to navigate.

Every trader by now knows to go long the XIV or ZIV when the VIX futures term structure in strongly in contango.  Likewise, it doesn’t take a genius to know that when the term structure is steep in backwardation, it’s time to go long their counterparts VXX or VXZ.

The thing that matters the most though is what to do during that middle ground when the signals aren’t as obvious, and that’s where our trading system has shined.  It’s the “give back” that needs to be avoided and we’ve consistently been able to reduce drawdowns to their lowest possible level which in the end is the reason our returns will continue to be superior in the long-run.

We’re long-term investors, not a short-term traders.  We don’t pay any attention to traders who claim to make massive earth shattering returns in the short-run because it’s those same traders that also suffer gut wrenching losses when things inevitably go wrong. And if people think August 2015 was the worst case scenario, I feel they are in for a very rude awakening. Maybe in a few months, maybe in a few years, but at some point I believe we'll see an event that really shakes out the weak hands.

If you’re like us, you’re trying to grow your retirement fund in a stable and consistent fashion and we invite you to start viewing volatility trading as an important addition to your current portfolio.  The cost of subscription is a small price to pay for the peace of mind of trading a strategy designed to mitigate risk during those unstable periods every few years that vaporize the funds of our competitors.

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