Over the last few years I have become increasingly vocal and accurate with my prognostications concerning volatility and the VIX itself.  And why? Well, mainly because I’ve seen far too many independent traders/investors fail to achieve their investing goals.  It can be quite a daunting task to invest without the help of an experienced investment advisor, enough capital for meaningful capital appreciation and the necessary education to invest with a strong acumen and level of comfort.  Resources, traders/investors NEED ample resources to achieve their investing goals long-term. “Going it alone”, as they say, is rarely a good decision and can often limit one’s potential.  So with that said, I’ve had quite the big mouth in recent years as I’ve penned nearly 500 articles, been mentioned in various media outlets another 100 times or so, participated with YouTube video presentations, shared my thoughts on radio broadcasts and found myself reaching out to fellow traders/investors via social media. I’m no advisor and you won’t catch me dealing in advice, but “what I would do if it were me”… See what I did there?

Since 2012 and shortly after a plethora of instruments/derivatives were introduced to the market for which to trade volatility, I’ve been doing just that.  Since 2015, I’ve been introducing the concept of investing in volatility, something that has proven a painful explanation and educating process for my person.  Maybe I’m better at practicing more so than educating?  Most every single narrative surrounding the notion of participating with volatility concerns utilizing VIX Futures or VIX-leveraged ETPs (Exchange Traded Products) as hedges and/or trading instruments. It’s very rare to find an article suggesting or offering a thesis to invest in these volatility instruments.  Simply put and with the understanding what I’m about to say will sound salacious and provocative, there is no greater investment vehicle for generating great wealth than VIX-leveraged ETPs. Below are the links connecting two of my more detailed narratives concerning an investment in VIX-leveraged ETPS, my favorite being ProShares Ultra VIX Short-Term Futures ETF (UVXY).  These two “blogs” were authored by me in the 1^st quarter of 2016 as I sought to explain this tremendous investment opportunity.

• The Greatest Trade Of The Decade Part   
• The Best Trade Of The Decade Part 2 

The two articles detail and compare “traditional” dividend investing long-term with a VIX-leveraged ETP investment strategy.  The articles were carefully constructed and explore just how strong an investment opportunity there is with regards to VIX-leverage ETP investing.  Going back to my favorite VIX-leveraged ETP UVXY, if an individual investor had invested $10k in this instrument from the day these blogs were published, the investor would have more than doubled their money. More than doubled their money: I can’t find a dividend investment that has offered such outperformance and with greater guarantees of returns on capital invested.

In recent years and months, shorting volatility has become increasingly popular with each passing month proving more popular than the past.  The following graph offered by Bloomberg identifies the greatest short participation during the month of August 2017:

The secret is no longer a secret as more and more traders are better understanding volatility and its derivatives. One reason that many media pundits fail to appreciate regarding the high, short volatility participation rate is that realized volatility is so low and has been for such an extended period of time that it has resulted in high theta loss to those who own it substantially higher. Those high theta losses were exacerbated recently as spot VIX prices stayed below 10 for a record amount of days.  For those owning volatility higher they are simply attempting to manage the losses with short-dated sales against the higher cost of ownership.  So if one was thinking the short volatility boat was skewed too heavily to one side, it is, but it is for more reasons than just complacency in the markets.  Those who have been hedging long positions with volatility have found significant paper losses for which they are now hedging their volatility positions.  Volatility will once again return as it always does and does so with a vengeance.  Such as it did with Brexit.

One of my most popular UVXY-dedicated articles came just ahead of the Brexit vote tally. The article is titled very simply UVXY Strategy For Brexit.  The main reason I wrote this article is because two “suspect Brexit-strategy” articles were written offering to go long volatility and VIX-leveraged ETPs. Timing is so very critical when choosing to do anything, anything whatsoever with regards to positioning long volatility/VIX.  I say this because many of these VIX-leveraged ETPs are quite literally designed to decay in share price long-term.  As outlined in UVXY Strategy For Brexit, the strategy was to raise cash in advance of the vote and layer UVXY short positions through the disseminated results and taking profits thereafter the results. The strategy was positively fulfilled as I recapped in the article UVXY: The Post Brexit And End Of Quarter Market Environment Trading Opportunity 

More importantly with regards to the offered strategy for Brexit was the complete comfort for positioning as I offered.  Regardless of the Brexit outcome, time was on my side when shorting an instrument designed to decay in price. “But UVXY did go up, Seth, and mightily”.  Yes, it most certainly did! The problem though for this long strategy was not the long entry in this situation, but rather timing the exit.  No more than 2 days later was the totality of the UVXY share price appreciation completely reversed for which most of that reversal occurred in the pre-market and before a trader would have had the opportunity to do anything w/held options or shares.  For my short positions, no timing was really required. The only thing required was the element of time and liquidity, which are synonymous for volatility traders/investors. Now just imagine if you held onto those short UVXY Brexit positions to date? What’s the calculation of that return on invested capital (ROIC)?  It’s for this reason I maintain a 20% of total investable capital assigned to my VIX-leveraged ETP investment strategy.

So let’s bring this article back to center and further discuss my UVXY and other VIX-leveraged ETP investing style/strategy.  For the greatest clarity and ease of explanation, I short volatility. There are instruments designed to short volatility from the long and short side of participation.  UVXY, TVIX and VXX are my instruments of choice for participating short volatility. SVXY and XIV are my instruments for shorting volatility, but from the long side of participation.  UVXY and TVIX are designed to decay in price over time and are double-leveraged meaning they seeks results (before fees and expenses) that correspond to two times (2x) the performance of the S&P 500 VIX Futures Index for a single day.    The transmission mechanism for which the monthly portfolio of VIX Futures contracts that make up the fund expire and roll-forward expresses a variable known as contango.  And in order to become a strong performing volatility trader/investor you should have a fundamental understanding of contango.  Critical, crucial, relevant…I don’t have my thesaurus, but just know how contango affects the share price movement of VIX-leveraged ETPs such as UVXY and TVIX.  Many are and have been of the opinion that contango forces the share price of UVXY and/or TVIX lower, but I’ve argued that it simply suppresses the share price appreciation, behaving much like an anvil on the back of the instruments.  It’s why even during periods of subtle VIX appreciation and S&P 500 declines, the share price of the mentioned VIX-leveraged ETPs will still decay.  I’ve often described contango as “the beast of burden” for those attempting to play volatility and UVXY/TVIX from the long side. I even wrote an article titled Contango: The Beast Of Burden For VIX-Leveraged Buyers.

Most publications regarding VIX-leveraged ETP investing center on the theme of using the instruments as hedges against one’s long portfolio positions.  And trust me, I get it. At any given moment, UVXY and or TVIX can spike in price in a magnificent display of share price appreciation.  That’s happened twice in the last two weeks alone.  But the question I propose one ask themselves is, “Did you time that spike or foresee it coming”?  Most, not some but most, aren’t that astute at market timing and with these particular instruments that’s exactly what you would have to be proficient in doing, timing both a long entry and exit. I’ve seen many a people on Twitter and StockTwits and visibly through the options chain try to time a particular market event for which volatility would spike and markets would decline in order to go long UVXY and TVIX. In all honesty about 10% of the time I’ve witnessed it work. That’s it!  Which also begs the question regarding the viability of using volatility and its derivatives as hedges.  If going long these instruments for the purpose of hedging only yields a 10% chance of extrapolating a profit then it fails to achieve the definition of a viable hedge. For all practical measures and results, you have the greatest of probability to lose capital on that “hedge”.  And week after week, if you watch Fast Money like I do, the commentators have lately been saying they’ve given up on hedging their long portfolio positions with volatility, as each attempt fails.

The beauty of volatility/VIX-leveraged ETP investing lay within the nature of volatility itself.  Again, for my followers you already know my long-since studied and proven thesis on the nature of volatility, but for those first time readers:  The nature of volatility is to become desensitized to the exposure of like stimuli over time.  While I’m not fond of giving the following example of the noted nature of volatility for its gruesome memory it is pertinent and very imaginable. September 11, 2001 was a gruesome day that brought with it a bear market and outsized market volatility.  Knowing that as a society, country and economy we overcame this event in our history, how do you think we would react to the exact same event should it unfortunately happen once again? My thesis regarding the desensitization of like stimuli is evidenced in global events of a similar nature that have occurred since 9-11 and found economies, markets and societies largely expressing lesser anxiety from these stimuli/events and such events having little to no affect on equity markets.  This is the nature and natural order of volatility and largely the reason that I’ve prognosticated for a long time that  “the VIX will achieve a new all-time low in time”. Additionally it should be recognized that volatility lacks the ability to maintain levels of heightening fear for long periods of time. Could you imagine investing in capital markets that express outsized volatility for extended periods. Simply put, there would be no market if that were the case.  At best, increasing levels of volatility/fear manage to last a couple of months, but more often then not only a few weeks.

As mentioned in the opening paragraph to this article, I have become increasingly vocal and accurate with my prognostications concerning volatility and the VIX itself.  I’m known for sharing and chronicling my understanding and practical usage of volatility investing. “You can’t predict the future, Seth!”  Well I certainly don’t pretend to be able to predict the future, but I’ve managed a decent job of predicting future volatility and VIX outcomes. So are we clear on the nature of volatility and how it mirrors itself in designed VIX-leveraged ETPs and the VIX itself?  Ok then, maybe we close this article out with a recap of my longstanding strategy that begins daily at sunup and carries through to sundown.  

I wake up in the morning feeling like P-Diddy, I’m out the door….no, no sorry but it had to be done! In all seriousness I start my morning at 5:00am EST from my bungalow home in Ocala, Florida.  Grab my smartphone off the nightstand and check equity futures as well as the UVXY pre-market trading price change. Up or down from the previous day’s closing price is of lesser consequence to me than ensuring the availability of shares to short and estimating my overall liquidity based on my assumed opening share price.  No options are used in my strategy based on the value of time decay as well as lacking the ability to trade options in the pre-market and after hours trading sessions that can prove very volatile. People very often get trapped and/or fail using options for VIX-leveraged ETPs. But if you choose to use options do so with great time value. Remember, time/liquidity is your greatest asset as a volatility trader/investor.

So it’s 6:00 a.m. EST now and Scottrade is open for pre-market trading. I want to be able to short shares of UVXY/TVIX or VXX should something “pop off”.  So whatever the pre-market trading price is I set a limit order for pre-market at least $.50 higher as I don’t necessarily want to get executed, but rather have the shares available for me to modify that order for the duration of the pre-market session and to the point I do desire an execution.  After the pre-market order is placed I set a limit order on the day. Once again the limit order on the day is also set substantially higher than current pre-market trading price as I’m simply ensuring the share are available to me for the trading day. If I’m in the business of shorting these instruments I have to be in the business of maintaining this active strategy of ensuring available shares to short. And I’m sure this answers a lot of folks “what if” questions. 

It is important and critical for maintaining a level of outperformance with a VIX trading/investment strategy to use a brokerage that does not or limits the activity of “calling in” shares. For those of you who utilize Interactive Brokers (IB) you have probably experienced your shares being called in.  Regardless of the brokerage house, they all have the right and ability to call in your shares absent notification. One day you might open your trading account and your position is no longer active because your short shares were called in.  I’ve been trading with Scottrade for nearly 17 years, have friends, colleagues and associates with the brokerage and never have I witnessed Scottrade call in shares. The key takeaway being described in this segment and for VIX trading/investing strategies is to ensure your positions will be longstanding and not subject to being called in.

It’s 9:30 a.m. EST and the market opens. Now it is just a monitoring the market game as I frequently check the options chain, contango percentage daily change and make a decision as to adding a short position for a scalp, swing trade and/or a build above my core UVXY 20% holding.   If I get an execution, yes I am placing another limit order to ensure more availability.  “But what if there are no available shares to borrow, Seth?”  I have maintained two brokerage platforms as I’ve been forced to accept that if one brokerage has no inventory of shares to borrow, the other broker might.  But in the case that both brokerages are void of shares to borrow I simply call up the brokerage and ask them to scour for inventory. Yes, I pay a larger fee for this service, but it is well worth it as the potential for UVXY and TVIX is to express a 99.99% ROIC over time.  The average decay in the share price of UVXY has been greater than 90% annually since my exposure to the instrument in 2012.  So yes, I’ll pay the extra fee! Having said that, it has been very rare that all three noted short volatility products have not had shares available to borrow at the same time.  Also having said that, if that should occur and I’m forced to short volatility by going long the likes of SVXY and/or XIV, that is also a fine option.  It should be noted, however, that the long instruments are not double-leveraged and carry a lesser ROIC than the likes of UVXY and TVIX.  Naturally SVXY and XIV carry lesser risk and a lesser reward albeit still a good long-term reward.

So now it’s 4:00 p.m. EST and the market closes. At 4:02 p.m. EST Scottrade allows for after hours trading so I place my short UVXY limit order in agreement with my sentiment of the day and prognostications for the next day. I finish up my e-mails, tweets/twits and bid every one in my circle of interactions a safe and happy evening.

Last, but certainly not least as I understand and appreciate forecasting is in demand regarding the markets and volatility, here is what my present “feelings” are on the two.  (Unfortunately, yes at this stage of my progressive interactions as a volatility trader you do get “feelings” that can’t be better explained more so than with that word) Recalling that I largely anticipated the recent rise in volatility by moving capital from UVXY exposure to VXX exposure and taking my total exposure down from 20% to 13% in the Golden Capital Portfolio, I’m glad to see that the layering of positions into the recent spike in the VIX and UVXY was met w/the inevitable “VIX/UVXY smash”.  I locked in profits from this recent VIX event only to find yet another VIX/UVXY spike.  Moreover, I recaptured my desired total exposure to VIX-leverage ETPs at upwards of a 15% greater share price from whence I covered the previous positions held.  This is the type of positioning and participation that can garner greater than 100% ROIC annually.  Imagine shorting at a price of $100 and covering at $10 only to re-short that same capital at $40 and being able to cover it again in the future at $10 per share.

With my core intact and the VIX moderating (14.26) above recent lows, but below recent highs, I’m forced to recognize some of the tailwinds and headwinds for the market as a whole.  A good volatility trader/investors should also have a sound fundamental understanding of the economy, the business cycle and yes even the political environment, which can prove to impact the former variables. The major averages are still hovering near all-time highs albeit with the benchmark S&P 500 having pulled back almost 3% from its all-time high, as anticipated and outlined in this YouTube video with David Moadel.

The U.S. political landscape has been a rough one since the new administration has taken to office. The recent news and forecast for political tensions seem to be heightening rather than normalizing.  I would be of the opinion that with the debt-ceiling deadline approaching in October  the market will seek to price in the potential for not achieving the raising of the debt ceiling.  Kind of a plan for the worst, but hope for the best-case scenario. The rhetoric for this event will likely ramp up in September and presently the decision to raise the debt ceiling remains one that finds bi-partisan disagreement and an unwillingness of either party to work constructively together. This is a big one folks!  This time around with the debt ceiling it could be one that is unlike previous events given the political discourse on both sides of the aisle and the repercussions of a government shutdown not to mention failing to make a debt obligation payment. This one would spill over into the broader economy even if only temporarily.  So be aware!

On the other side there is the economy, which is continuing to grow alongside consumer spending and retail sales. Even more importantly are growing corporate earnings. Heading into the Q2 2017 earnings calendar the expectation was for earnings to have grown 6-8% for the quarter. Coming out of the Q2 2017 earnings cycle the realization is that earnings will have grown roughly 10 percent.  That is quite the strong rate of growth and further evidencing why the overall bullish market sentiment is justifiable.  And we can make the claims that the market is overvalued based on historic multiples all we desire to, but as earnings go so do markets.  So with the headwinds and tailwinds under examination we likely have a good tug-of-war to contend with as we round out August and enter September. 

I will force myself to recognize that trading capital more so than investing capital is an optimal strategy over the next 6 weeks, being vigilant and nimble with positions.  I will also maintain a large percentage of assets in cash with the ability to scale short positions into any near-term VIX spike or sustained market pullback.  I would not be afraid to take small profits or small losses from trading over the next 6 weeks and leading up to the debt ceiling decision. So if you desire for a salacious-Seth comment here it goes. If you appreciated Brexit for the short volatility opportunity it presented, wait until the debt ceiling, last hour decision is upon markets. Such an event could prove the equal with regards to volatility trading and/or investing.