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Do your own research, don't do this if you don't know anything about options etc etc etc, but If you're concerned about a huge market crash (like I kind of am)
by MrLeap 9y ago
Do your own research, don't do this if you don't know anything about options etc etc etc, but If you're concerned about a huge market crash (like I kind of am) here's what I'm doing:
In addition to your regular portfolio distribution, Buy long expiration UVXY puts. UVXY tracks volatility futures. Higher the volatility, higher UVXY price. A put gives you the option to sell shares by a certain date. ETNs that long volatility tend to decay like crazy, buying puts makes this work in your favor so it's not so expensive to hold long. This step is optional, I just like the collecting a premium off the vicious decay while I wait for the "real opportunity".
Now at some point we'll probably encounter some kind of crisis that'll make your long expiration UVXY puts look terrible if you've got any. This is when you buy even more, short expiration UVXY puts. (Weeklies and monthlies.) When the crisis passes, your short term weeklies should be worth quite a bit of money and your long terms will have recovered as well.
You'll have to learn about cotango/backwardation to get a robust execution strategy, but my heuristic is to start building a small position when the VIX is 14, and if the vix gets to 20 start going hard on those monthlies. If "the big one" hits we could see the VIX get to 50+, so if you're guarding that maybe fewer weeklies and more monthlies. :P
- nugget 9y agoWhat's the end game here - when SHTF you don't care about your puts, because you've finally got a great buying opportunity for the bulk of your cash reserves? How low does it have to go before you start trading the other direction?
- MrLeap 9y agoI don't have firm rules for when I exercise my puts. I should probably work on some. I basically weigh a few heuristics. If you look at the VIX historically, it has an extremely strong mean reversion. This should make some sense. The whole market is based on people trying to find a price consensus. Volatility should decrease over time as consensus is reached. Sometimes the `underlying level` will lazily drift up, but that's not what this strategy is really trying to capture. This strategy is trying to capture volatility created by NK scares and rumors of chinese trade wars. The initial panic of all these catalysts is always (so far) relatively short lived, even if it results in an increase in the underlying volatility level moving forward. https://www.tradingview.com/symbols/TVC-VIX/ https://www.tradingview.com/symbols/TVC-VIX/ If I were to algorithmize this strategy, it would probably be something along the lines of buying tons of puts whenever the volatility goes to 2x its 10-20 day EMA, and selling out of the position whenever it returns to within 20% of the previously established EMA limit. I might be off on my estimated coefficients, but I bet that such a semi-optimized version of that backtests pretty well. I struggle to imagine what would double the spot of vix and have it stay in a long term sustained backwardation. If I ever see it happen, and sustain for 3+ months, I'm buying guns and alcohol.