E Are We Shorting Volatility And How

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 1st quarter of 2016 as I sought to explain this tremendous investment opportunity.

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 

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Disclosure: I am short UVXY, TVIX, VXX

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Jim Bradley 3 years ago Member's comment

I appreciate you Seth for your undying effort to educate traders/investors. Thank you for the insight into your trading day.

Duke Peters 4 years ago Member's comment

Good stuff.

Brent Malay 4 years ago Member's comment

Thank you for a most interesting article. This is indeed and exciting trading avenue. I am though confused about something: if you only allocate max 20% of your portfolio to shorting volatility, and that short portion delivers a return of about 100% a year, how is it possible that your entire portfolio (including the 80% that is not exposed to short vol) could be up 100%?

Seth Golden 4 years ago Author's comment

Return on invest capital or ROIC is the amount of return on the invested capital, not the total return. But inclusive of the other portions of the portfolio I've also done quite well i.e many trades in TGT, FIT, TWTR ownership of FB, INTC, MSFT and a few others that are up nicely.

Vibrant Cosmos 4 years ago Member's comment

Thanks for nice insights into you trading day and process. Most of all I admire your discipline to not to over-leverage and keep nimble.

All the best, looking forward for more tweets from u during debt ceiling.

Seth Golden 4 years ago Author's comment

Thank you Vibrant for the comment and complement. Hopefully some of the articles have found there way to your betterment of trading and investing as well!