Q3 2015 Strategy Report - Volatility Trading Strategies

What I’ve been talking about for over a year now has finally happened.  The long overdue correction in the stock market finally came and with it, an opportunity to showcase our risk management techniques.  We not only crushed our own benchmarks but we have once again weathered the storm better than our fellow volatility traders out there.  I never wish ill on anybody but it has to be reported that many of them suffered severe losses these past few months.  It was not uncommon at all to see 30 – 50% losses over the quarter and a few have stopped updating results altogether.

Our method of scrutinizing the trade signals and only taking the ones we have the highest conviction in has once again proved very effective as we were in cash for all but the initial down trend in XIV.  We took some small losses the week leading up to it but by the 19th of August we were safely in cash, which was great because just one day later on the 20th things really started to get ugly.  By the time the dust settled, the XIV itself was down a fund vaporizing 55.5%.  It’s not hard to see why aggressive traders got burned. That was an incredible volatility spike with the VIX going from a 13 handle into the 50’s in just one week. Times like these really make us appreciate all the focus on risk management.

August of 2015 will go down in history as one of those “how did you do during x” dates we traders use to measure the effectiveness of our risk management techniques.  How did you do during the flash crash in May of 2010?  How did you do during the debt crisis in August 2011?  And now, how did your fund perform during the VIX spike to 53 in August of 2015?

For us the answer to that question is, great and you?

Going forward I’m expecting the markets to remain quite volatile for at least the next 6 months.  Debt ceiling and budget talks will likely flare up soon which should put the media in a little bit of a frenzy, and then leading into December we’ll go another round playing our favorite FED policy predicting game of “will they or won’t they.”

The FED can’t seem to muster the strength to do what we all know must be done, and that’s raise interest rates from the zero barrier.  It’s been nearly a decade now since rates were raised, and if they wait until conditions are perfect I fear the long-awaited “lift off” is never going to happen.  We’ll hit the next recession and rates will still be at zero which won’t leave the FED with a whole lot of ammunition to stimulate next time around.

Regardless of what the FED does though  (I suspect they will finally raise rates in December) things are shaping up to remain volatile into at least next year.

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