Am I Crazy Enough To Short Volatility Here?

By | January 21, 2015

Scalper1 News

Recent volatility in stocks has presented yet another opportunity to profit. The VXX has moved up sharply after I went long and as a result, I sold my position. I’m now back to being short the VXX on a bet that the markets will calm down this week. Early last week I wrote a piece about how I had gotten short volatility and then reversed quickly after realizing the market was moving against me. That proved to be a fortunate thing to do as I missed the big move up in volatility (in the good way) by not being short. As I detailed in the linked article, I chose to get long right as I sold out of my short position via the short VXX ETF (NASDAQ: XIV ) and moved into a long position in the VIX ETF (NYSEARCA: VXX ) while hedging with covered calls. In this way, I wanted to capture huge premiums that were available on VXX call options and also take advantage of what looked like a coming move up in volatility. As it turns out, that was the way volatility moved last week and the VXX closed up huge on the week. I was fortunate enough to capture most of that move but by hedging with short calls, I did give up some potential upside. Still, being long the VXX for four trading days and hedging with calls netted me a 6% total gain in four days; not bad work if you can get it. The flip from short to long volatility certainly worked out in my favor and given the gains that I achieved in such a short time span, I carefully considered my next move for this week. In doing so, I considered where the VXX had come from and how far it had moved since having a big downturn. This is a one year chart of the VXX and what it shows, as most of us know, is that VXX tends to spike when it does go up and then fall precipitously seemingly without warning. (click to enlarge) I started shorting VXX back in October during the mini-crash that roiled stock markets and since that time, have had pretty good results getting long and short volatility at different times. The most recent spike that has driven VXX up to as high as $37 seems to be running out of steam, in this humble trader’s opinion. And therefore, I’ve decided once more get short volatility via the XIV, the ETF that provides the inverse, unleveraged return of the VXX. For reference, I sold out of the VXX at $36.63 and bought the XIV at $26.45 a few moments later. If you like, of course, you can just short VXX but that’s expensive and difficult to do so just buying XIV is much cleaner. At any rate, the decision was made to get short volatility because I feel like the fear and panic was wavering at the end of the week. Several days of markets being beaten over the head with terrible news and heavy selling tends to exhaust traders and in a world where the central banks of our nations can move markets higher simply by talking, I feel like recent history provides decent precedence from which we can derive the duration and severity of up moves in the VXX. Of course, nothing is perfect and I could be dead wrong about this move being done but in order to make some money, you’ve got to take calculated risks. For that reason, I think getting long XIV here makes lots of sense. There is no doubt that the VXX clearing its previous high from December means we’ve got a situation on our hands. There are plenty of reasons for volatility right now but what I’m betting on is that there will be at least a small reprieve from the panic. Panic, by definition, can only last for so long so a trade into XIV is a bet that the panic is ending and that normalcy will return, at least for a few days. Keep in mind that you don’t need to be right for a long time to make money on this trade; I’m essentially renting XIV until some calm returns to markets again and then it’s back out of the short volatility position. As always, please understand that trading volatility, particularly from the short side, can be quite hazardous. If some shock occurs VXX will spike and XIV will crater, leaving you with massive losses. Please understand how the ETF works and what you’re risking before taking a position. The plan right now is to stay in XIV until one of two things happens; either normalcy returns to markets and XIV moves up very nicely or I’m dead wrong and I get crushed and limp away with my losses. Either way, I think we’ll know this week which one it is and at that point, I’ll reassess which side I want to play on the volatility front. In my first volatility article of 2015 I mentioned I’d keep you abreast of my thoughts and any moves I ended up making and I’m trying my best to do that; please remain engaged in the comments sections because we’re all learning together and sharing thoughts and ideas and I love it. Good luck out there. Scalper1 News

Scalper1 News