Due to the unsurprisingly high volume of questions I’m getting this week I thought it would be more efficient if I pick out a few of the ones that keep coming up and talk about them in a few of the daily blogs. I do want to stress though that you can ask me anything. A lot of people preface their questions with “sorry to bother you” or “sorry to waste your time.” I’m not going to lie to you, I’m a busy guy even on calm days so yes I’m a little swamped given this weeks action.
But please ask your questions. I promise you in a few weeks this will all be behind us and we’ll be laser focused on the future as always. Nothing is going to change for us. We are all conservative investors and will remain that way. We’re in a great spot with opportunities abound. When we can get into some new trades we will. Right now though it’s important to get your questions answered so don’t feel bad asking.
1) What will happen to the VTS Tactical Volatility Strategy?
Well the XIV is going to be terminated which is the main underlying ticker in the strategy so clearly something needs to be done. There’s two basic options that I am considering right now. I don’t yet know which it will be, but please feel free to offer any feedback you have of which you prefer:
Option a) Just switch the ticker out to SVXY and continue as usual. There’s some merit to this as the strategy has been running for a very long time. Also as I mentioned yesterday, the underlying ticker matters far less than the general concept of harvesting the volatility risk premium. So maybe just use SVXY.
Option b) Stop trading the strategy and focus on the VTS Aggressive and VTS Conservative which will continue as usual. Of course I would keep all the old videos up on YouTube as well as keep the main performance page fully viewable forever. I do think transparency and posted performance is vital in the investing world, so regardless of the reason any strategy closes (in this case no fault of our own) I would still keep everything I’ve ever written about it visible.
2) What should we do with our current XIV, SVXY, ZIV positions?
This is for those people that went rogue against my recommendation to be in cash and actually got caught holding them. Again, so sorry for your loss. So what to do? Well I can’t give out any personalized investment advice, but in general just remember that the whole reason why people got themselves into trouble in the first place was doing something that I have been saying we should never ever do.
We never buy inverse volatility products when the VIX futures term structure is in backwardation (downward sloping). It’s just too dangerous. Most of the time it works out, but occasionally it blows up. That is the nature of asymmetric risk. Many inexperienced traders just end up making large profit today and then giving it all back somewhere down the line. They think they’re a genius with all that easy money, and then one day they very quickly find out they’re not. Asymmetric risk.
The VIX futures term structure is currently strongly backwards so the same advice I had last Thursday applies today.
For investors it’s not a good idea to hold short vol products until the futures recover. I’m not saying you can’t, but it’s very high risk and that’s not hyperbole. It literally happened 2 days ago so keep that in mind.
For day traders and for anybody who just allocates a very small amount of money and who know all the risks, in general I would say right now being short vol is safer than it usually is. For a whole year I have been talking about how risky it is to short vol when it’s low, but it’s actually less risky to do so when volatility is high like it is now. Also the termination of XIV does leave us with a fairly lopsided market right now so there may be a little gravity at work there in the volatility space.
But I won’t do it and our strategies won’t either until the trend is confirmed. The strategies trade strictly by the numbers, that’s how we are successful. Emotionless and just taking what the markets give. No matter how tempting it is, I will not front run it.
3) What should we do about AutoTrading?
If you’re currently using Global AutoTrading or eOption to have my trading strategies executed on your behalf, you’ll have to contact them and let them know which of the other two volatility strategies you’d like to continue with.
Either VTS Conservative Vol or VTS Aggressive Vol. They are both trading normally now so if you want to be ready when the next trade signal flashes please do that. I’m sorry I can’t do it for you, but I can’t make any changes to anyone’s account on my end. It has to be authorized by you.
Conclusion: While I won’t get much sleep the next week, I promise you this isn’t armageddon. For those who have been following me for a while now, how many times have I warned that events like this happen sometimes? Dozens right? And there will be more scary events like this in the future and I’ll talk about them too when they are developing.
The secret to long-term success is to pay full respect to BOTH sides of the trade. Yes we love profit, who doesn’t? But we also focus a lot on risk management and this week is a great example of why that is.
Current VTS Total Portfolio Solution Allocations
VTS Aggressive Vol Strategy – Optional replacement for higher risk tolerance investors
VTS Conservative Vol Strategy – Optional replacement for lower risk tolerance investors
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