Friday, July 17, 2015

Welcome to Volatility Fantasyland

In this post I wanted to clear up some common misconceptions about investing in products such as UVXY and VXX. In addition to misconceptions we will review some general examples of what not to do.

For the basis of discussion we are going to use StockTwits posts from the last several days. I am leaving out the author's name and picture.

1. I'm going to buy on the dip.

Great advice, if this were a profitable company you were looking to own over the long-term. When looking at the long-term chart of UVXY I really don't see an opportunity to buy the dip.

2. Suffering

It looks like he originally bought the dip, but forgot about time value decay. I think he gets the point now.

3. Panicking 

Brave enough to ask for help and wise enough to realize she made a mistake.

4. Oversold

Again, just like the buy the dip philosophy this doesn't apply all of the time in the world of volatility. Especially with contango sitting at 13%.

5. Just believe 

No one cares about your beliefs and volatility trading should take advantage of the errant emotions of others, not yourself.


Yes, there are times when UVXY and VXX can produce amazing results. Check out this article that backtests their performance from 2008 and 2011. Both of those events had one thing in common, recessionary realities and fears. We are nowhere near clear signs of an approaching recession. The only way you are going to make money off of UVXY and VXX right now are through geopolitical risks. If you have noticed, those risks have subsided drastically the last few weeks. Disasters are unpredictable but serve as another opportunity to profit. However, unless you have a crystal ball I would stick to the strategy of shorting these vehicles after a spike in the VIX.

Hopefully you are sitting on healthy profits from the last few weeks, I know I am. Patience until the next event my friends. If you have money that you don't need and are looking to gamble, be my guest, it's a free country. Just know your risks and be ok with losing half your bet.

We need people that make poor decisions like above. They provide us with the liquidity to short these instruments. However, I won't sit back and let my readers make the same mistakes. I have been saying the same thing ever since I have started writing on volatility. Stop chasing the boulder up a hill, wait for it to start to rolling back down and then run behind it.

Thanks for reading and I hope you have a great weekend!


  1. You can add me to list in 2012. Bought and sold UVXY. Made 5K profit in one day only to make 7K loss the next day. Did not understand this instrument then. Now I only trade SVXY.

    On a diff note now that the spike is over, for the most part next spike would occur in mid september or october frame. So do you think its good to get back in SVXY on a pullback since volatiliy will be low anyway till then so svxy will keep going up?
    Just want a discussion. Thanks.

    1. Hi Amar,

      Personally I would only purchase SVXY once the VIX has spiked. You don't want to purchase SVXY when volatility is low. Yes, you can profit if contango stays high but you also have a lot of risk in holding once the VIX begins to spike again. I would recommend reviewing some of my article on SVXY on SeekingAlpha. I think you might find them helpful.

      Thanks for reading!