The Tradimo team has had a real money account for over 2 years and has achieved a return of almost 60% in this period. If you follow us carefully, you have certainly noticed that we are making far fewer trades this year and that they deal with products of volatility more than average.
2020 offers extraordinary opportunities
The year 2020 is characterized by high volatility and makes it difficult to apply common strategies and normal trades. But you can also use this problem to your own advantage. Trading on the stock markets can be very profitable but also very expensive in such market phases. In addition, you always need a firm market opinion.
We took advantage of the many opportunities offered by the high volatility and thus the uncertainty in the markets. It is important to emphasize at this point that there are different types of volatility:
- Volatility of price developments
- Historical volatility
- Implied volatility
Before we go into our trading spots, let’s first explain the above three terms in more detail.
Volatility of price developments
This term is quick and easy to explain. What is meant is the range of the price movements. You can see this without being an expert:
Before 2020, there was only one major price drop of around 20%. In 2020 we saw a rapid price decline of 35% and a very rapid price increase of 65%. These are extraordinary price fluctuations. The causes are secondary.
Or have it mapped using an indicator such as the ATR (Average True Range):
The average fluctuation range based on 14 weeks has risen sharply and the current level is higher than in the previous 10 years.
Historical volatility
To put it simply, the historical volatility can be compared to the ATR.
But you can clearly see that the increase in the past 10 years is nothing new. The current level is also more in line with the long-term average. In general, it can be said that historical volatility itself is of little significance. Historical volatility only gains strength in the context of other values.
Implied volatility
Implied volatility measures the demand for options on an underlying asset. If the demand increases, the implied volatility and ultimately the price of the options increase. This can be explained very simply: when the markets heat up, many investors want to protect themselves with options.
The best way to see the implied volatility on the S&P500 is on the VIX:
The increase is unparalleled and was not achieved even on the basis of the closing price during the subprime crisis. Much more interesting is the current value of the VIX. Despite the strong decline, the current level is still well above the long-term mean of around 17.
On the one hand, this means that it is currently still worth selling options at high prices and generating premium income. However, it also means that the preference for coverage is still there due to ongoing uncertainties, which has to do with the upcoming US elections.
It also means, however, that in the medium term one can assume that the currently excessive value will “normalize” again. We rely on exactly this scenario by having various products in our real money account that benefit from a falling VIX.
What cannot be read from the previous chart is the fact that there are different maturities on the VIX. If you put all maturities together in one chart, the result is the term structure curve:
What you see in this diagram is called backwardation. The back contracts show a lower value than the front contracts. This is rarely the case and in the medium term this curve will turn again and show the opposite picture. Then the front contracts will be cheaper again than the back contracts (contango).
Short Vola products
There are several products that benefit from falling implied volatility:
VXX
With the VXX you almost always have a kind of calendar spread on the first two contracts in the VIX. Since the calendar spread decreases in value in the long term due to rollover losses (contango), the VXX also decreases in the long term.
UVXY
The UVXY is basically the same as the VXX, only with the crucial difference that the UVXY is leveraged and therefore has to be observed more closely.
SVXY
To put it simply, the SVXY is the mirrored VXX. If the VXX increases, the SVXY decreases and vice versa. In the long term, the SVXY will tend to rise.
All 3 products are ETFs and cannot be traded directly by retail traders in Europe. The way out remains options or trading through a company.
Calendar spreads on the VIX
In addition to some positions that benefit directly from falling volatility (VIX), we also have an advanced strategy. With this strategy, we are betting on a tilting of the term structure curve. During our research and the associated back tests on the strategy, we found that the strategy is lucrative even in less volatile market phases and have therefore developed a new income strategy.
Basic concept of the VIX strategy
We are selling a calendar spread with a gap of 2 futures at the rear end of the futures structure curve. This is currently the March-June spread. The aim of the trade is that we see a normalization of the term structure in the next 5 months. Of course, sensible money and risk management is part of this strategy, as violent price movements are not uncommon in the VIX.
All details of this strategy were shown in a webinar for our premium members and can also be made available later.
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