After hearing about the tremendous returns Seth Golden has earned year after year, I felt that my own annual returns, which were already good, could be much better if I joined in the short volatility product trade. This meant taking short positions (or selling calls, buying puts, etc.) on UVXY/VXX/TVIX/VIXY/etc. and/or taking long positions on XIV/SVXY/etc. when the time was right. Easy money, right?
There is no easy money for retail traders, but most of the time I got lucky and realized good profits in a few days or even intraday with the short vol product trade. But then….. there were days like this:
… both from this past week, incidentally. It’s frustrating to take a short vol product position, only to see the S&P 500 bright green, and perhaps even spot VIX deep red, yet UVXY/VXX/etc. are green and just won’t go down like they “should.” This price action seems to defy logic and can cause folks to want to forsake the short vol club.
Patience and plenty of cash (at least 50% of one’s portfolio is commonly recommended) are necessities if you’re going to be engaging in this type of trade. This past week, the M1 and M2 VIX futures traders decided to “do their own thing” and ignore the price action of the S&P 500 as well as spot VIX (which is determined by put and call trades made on S&P 500 index options). It seems that these futures traders may have been expressing their concerns that the current to-the-moon melt-up in equities ought to correct soon. Whether their predictions turn out to be correct or not is immaterial to the current price of UVXY/VXX/etc.; all that matters is that these futures traders have the independent ability to boost the prices of these vol ETP’s whether it makes logical sense or not.
But take heart, vol product shorters worldwide: time and liquidity will, most likely, allow your trades to work themselves out in time toward a more logical conclusion. And if time and liquidity aren’t your strong points, then perhaps the short vol trade isn’t for you, or at least you’ll need a capital and attitudinal adjustment before proceeding.
The short vol club: It’s money, but it’s definitely not easy money.
Tags: SPY TVIX UVXY VIX VXX
Haha…Very good one David..Thank you for analysis/advising on these tough weeks.
Thank you Sunil, the article is therapy for myself and others
Very well said David. Time and liquidity are the only friends, short volatility traders Should lean on and let u sleep well at night.
Liquidity of 50% cash is a must, that also keeps a check on one’s greed, not to over leveraged.
Thank you vibrantcosmos, I have made the mistake of shorting more than 50% of my account but I’m more disciplined about it now. Now I can relax and sleep more soundly