Vol Trend strategy - Video and Article tutorials
If you're not familiar with options trading it may seem a little daunting at first but trust me, once you execute a couple of these trades you'll realize it's just as quick and easy as any other trade and I have no doubt that all of you will be able to execute these in 2 minutes or less.
Whenever there is a new trade, simple trade instructions will be given in the "VTS Daily Trade Signals" email so you can easily follow the Vol Trend strategy.
Here is a basic video overview of the strategy:
Additional video tutorial on how to scale the # of contracts:
Let's go through an example of a Vol Trend strategy trade:
Breaking down the shorthand lingo for those trade instructions above:
25% - This is the current allocation size for the Vol Trend strategy within the Total Portfolio
Buy to Open - It's an option contract we buy when opening a trade.
Sell to Open - It's an option contract we sell when opening a trade.
18 Feb 22' - This is the expiration date of the contract, in this case February 18th, 2022
VXX - Our Vol Trend trades are usually on the volatility ETP called VXX due to the liquid options
Put - Our Broken Wing Butterfly options will always be using Put Options
19 / 18 / 16 - These are the Put option strikes for the trade
1% of net liquidation value - The allocation size based on the total value of your entire account
Here's what that above trade example looks like visually:
Determining the # of contracts to open:
Step 1) Calculate the amount of capital to allocate to the trade
The allocation size will always be given in the daily email. It's not always the case, but typically we will be allocating 1% of your total net liquidation value of your entire trading account.
Your entire trading account * 0.01 = Vol Trend strategy trade allocation
- If you have 25,000$ in your trading account: 25,000 * 0.01 = 250$ for this trade
- If you have 100,000$ in your trading account: 100,000 * 0.01 = 1,000$ for this trade
Step 2) Adjust the contract size to match your trade allocation
If you don't have a trading software that makes it visually easy to see the maximum loss, you can use step 3 and actually calculate it. However, most trading softwares these days will allow you to see your trade in the software, so you just adjust the contracts until the maximum loss for the trade (on the left wing of the trade) is equal or below the allocation size you determined for this trade.
- If you have 250$ to allocate, adjust the contracts until you see the maximum loss is 250$ or less
- If you have 1,000$ to allocate, adjust the contracts until you see the maximum loss is 1,000$ or less
Step 3) Calculate the contract size if your trading software doesn't easily show it
1) First you'll need to determine the multiplier, which is just the strike gap of the two closest ones multiplied by 100. So in the example from above, a Broken Wing Butterfly with strikes of 19 / 18 / 16 has a strike gap between the two smallest ones of 1$ (19 / 18). 1 * 100 = Multiplier of 100$
2) Next you'll need your allocation size that you calculated before. Remember that's just 1% of your total net liquidation value of your entire account. For this example we'll just assume you have 1,000$ to allocate.
3) Lastly you'll need the premium the Broken Wing Butterfly multiplied by 100
# of contracts = Trade allocation size / ( strike gap * 100 ) + ( premium * 100 )
Example 1 using a positive premium (debit) of 0.25
# of contracts = 1,000$ / (1 * 100) + (0.25 * 100)
# of contracts = 1,000$ / 100 + 25
# of contracts = 1,000$ / 125 = 8 contracts
Example 2 using a negative premium (credit) of -0.25
# of contracts = 1,000$ / (1 * 100) + (-0.25 * 100)
# of contracts = 1,000$ / 100 + (-25)
# of contracts = 1,000$ / 75 = 13.33
* Always round down, so this trader opens 13 contracts
Trading Broken Wing Butterflies is WAY easier than it all looks:
Explanations are intentionally wordy because I have to be thorough, but like I said once you trade a couple of these you'll be able to do this entire process in less than 2 minutes. The difficulty lies with choosing the right trades at the right time, and then managing them correctly through the lifecycle of the trade. Fortunately, that's my job and you will only have to look at the trade instructions and execute, very easy.