Trading Volatility In A Post-Trump Election

The post-Trump election victory did not produce the widely anticipated and/or forecast downtrend in the equity markets. In fact, it produced quite the opposite once the initial shock was dispensed with by investors.  Wednesday morning’s pre-market trade found the major averages down almost 2%, but upon the markets opening for trade, this quickly reversed. All-in-all, the Dow and S&P 500 have rallied since Wednesday by almost 2% while the Nasdaq has lagged with some of “Trump Stocks” like Facebook (FB​), Amazon (AMZN) and Apple (AAPL) falling hard; all of which were highlighted during President-elect Trump’s campaign. 

Moreover and as it pertains to the overall investing environment, my recent article highlighted the opportunity presented by ProShares Ultra VIX Short-Term Futures ETF (UVXY). In the article titled “UVXY: Election Time Fast Approaching”, I explained how UVXY is constructed to decay in price due to its double-leveraged correlation to S&P 500 VIX Futures.  The nature of VIX or volatility is such that elevated levels of VIX/volatility can only persist for short periods of time. With that factual representation, it is understood that shorting volatility into these spikes can and has been profitable since the trade of volatility has existed in the marketplace.  The chart of UVXY below, a VIX related ETF, identifies the short opportunity presented with the instrument since the IPO in 2011. 

As noted, I offered to investors and traders shorting UVXY during the spike in volatility that may occur during the election cycle.  Such a spike in UVXY was presented whereby shares of UVXY rose in the pre-market to just over $18 a share but plunged on Wednesday as markets soared and volatility eased. Following the spike to $18 a share, UVXY traded to a low of $13.11 on November 10th.  One could make the argument that a long UVXY position would have been profitable going into the election results as shares of UVXY did rise sharply. Having said that, the “timing” needed to exact a profitable trade would have been difficult to perform and based entirely on hope.  UVXY is constructed to decay in price long-term. As such, trading the instrument from the long side begs of great timing for entering and exiting the trade.  Trading or owning UVXY short, long-term takes nothing more than time to generate profits. That time frame can often be as little as a day or as great as a few weeks, but nonetheless, time is all it takes. Hope is not a requiem for shorting UVXY. 

As investors digest the unexpected post-election rally that has been presented and found the Dow Jones Industrial Average achieving record levels, what comes next is difficult to determine.  What is not difficult to determine is the fate of UVXY and other VIX-related ETFs like VelocityShares Daily 2x VIX ST ETN (TVIX). Regardless of the facts presented within this article, the ETF’s mentioned S-1 filing or the chart displayed, traders still utilize these instruments from the long side of the trade.  Most that I come into contact with lose capital trading in this manner. They cost average down until they give up on the trade and take a substantial loss. They ignore the facts and undeniable variables surrounding the construction of VIX leveraged ETFs and ETNs. They ignore the charts and reach for the hope that suggests VIX is at low levels and will bounce higher, pushing UVXY and TVIX higher. These traders also ignore what happens to these ETFs when contango takes over, even as the VIX edges higher.  And when this happens you will often see the cries of foul play on Twitter (TWTR ), StockTwits and the like. 

So here we are after an outsized market rally that has boosted the equity averages even as the future remains uncertain for the economy and the nation as a whole.  I believe the recent rally may be short lived especially when viewed through the prism of an interest rate hike cycle. Come December, it is anticipated that the Fed will raise rates by a .25 basis points.  Regardless of the size of the hike, investors are forced to rebalance portfolio positions to accommodate for risk. This often results in “derisking” from the equity markets in favor of yield.  It’s plausible or more probable that the coming weeks will find investors rebalancing their portfolios in favor of bonds or high yielding equities in preparation for December’s Fed hike. This could find the VIX edging higher, carrying UVXY with it.  This is, as it always is and has been, the greater opportunity for traders and investors alike.  Shorting shares or executing options of UVXY into such a rally will produce comfortable profits once such a rally peaks. The longest rally in UVXY over the last several years has been 3 weeks, give or take a day.  UVXY rallies can be intense and extreme in price spikes.

The opportunity will be presented to short UVXY at higher levels than today and we may happen upon this opportunity in the near future.  I will be positioning my portfolio for end-of-year rebalancing as I’ve carried the greatest percentage of capital with UVXY short positions throughout 2016.  My goal is to continue taking profits as I leverage my UVXY dedicated short positions back down to 25% of my portfolio by year’s end.  Having said that, when the opportunity to short shares of UVXY from higher levels is presented, I will participate accordingly. 

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.