A Summary On Shorting Volatility - Farewell Edition

| About: iPath S&P (VXX)


Key metrics I use for shorting volatility.

A review of articles and education available here on SA.

A farewell for now.

Hello everyone, I hope you have been well. I know it has been awhile since my last article and I haven't forgot about you. Since the Brexit vote we have seen what can only be described as an epic drop-off in volatility.

This article will be a summary piece for all of the volatility shorting strategies and tips we have discussed in the past. This article will also be the last piece I write for quite a while. As most of you know I am a teacher and the new school year is rapidly approaching. However in early October I will begin working towards a doctorate in education. Needless to say, time will become a very valuable resource.

Contango and Backwardation

This strategy was the first idea I presented when I began writing on volatility. For a summary of what contango and backwardation is you can view this video. This strategy performs well in periods of rising markets and will help to prevent extreme losses during periods of falling markets. However, as we saw in 2015 the strategy doesn't always perform well in a stagnant market. For more on this strategy you can view this article.

My current advice for new traders is to work on creating your own system and strategy. I use contango and backwardation as a guide but my current system focuses on the top percentile of volatility events and takes into account the context of the situation. This system can actually go several months to a year without a signal to short volatility. It is conservative and it works for me. Find what works for you. For more on the top percentiles in volatility follow this link.


Something that differentiates my writing on shorting volatility is the focus I put on the context of the event itself. I use historical reactions to events to determine how I will trade and respond to present events. I completely leave out predicting spikes in volatility or trying to time a top which are often just guesses. This is why I prefer to short volatility and don't even worry about the long trade. It has never worked for me personally and I only feel like I am gambling.

I have previously written about how I categorize volatility events. I describe an event as really any substantial increase in volatility. Those two categories are economic and political. Economic volatility events tend to drag on for long periods of time while political events are somewhat short-lived. For more on the context piece view this article.

A piece that I feel is decent but didn't get a lot of coverage was neuroeconomics and volatility. It provides a different viewpoint on context and volatility in general.


What I am most proud of in my writing has been the resources created for those new to volatility trading. At times, I felt like a negative Nancy with my preaching about the risks involved with this asset class. However, as we have seen, especially after the Brexit vote, these products can go through events that would require liquidation, leaving a leveraged investor with a negative net worth. The following beginner series provides good references for traders seeking first to understand rather than just seeing a pie in the sky; (those articles can be viewed through the following links):

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX): VXX

VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV): XIV

VelocityShares Daily Inverse VIX Medium-Term ETN (NASDAQ:ZIV): ZIV

Bet Sizing

The key to successfully shorting volatility lies in proper bet sizing. This is something that I learned from my readers instead of on my own. Had I known about this when I started trading many years ago, I could have had much greater returns. More on proper bet sizing can be found here.


I have sincerely enjoyed writing here and hopefully some day I can return again. There just won't be enough hours in the day as I work to complete this challenge over the next three years. Know that 100% of everything I have made on SeekingAlpha has found its way back into the lives of public school students who genuinely need it. I teach because teachers saved me; now I am working to save countless students from become statistics. Not many people can teach at the school I work in. I am very proud of the work we do for our kids and I thank you for helping them.

I invest because I truly love it. The highs, lows, and thrills are better than any entertainment I can buy. Volatility investing can be dangerous. However, if done properly without a get-rich-quick attitude, you can see returns that will consistently beat the major averages. In a world of slow growth and low rates, volatility investing will only grow in popularity as traders and investors seek higher returns. This will create a lot of opportunities to take advantage of mistakes made by the less educated.

If I could review all of my articles, the No. 1 word and the last piece of advice I would have for you is patience. Wait for it. You can do a lot of work for nothing when it comes to volatility trading. Don't chase events that didn't go your way. I've taken beatings from people who flat out insisted I was wrong for advising people not to trade and to wait for better opportunities. In the end, I am still ahead of the market. Read everything you can and educate yourself on the products you invest in. Look at and investigate others viewpoints, even if you don't agree. Make your own system, stick to the data, admit when you're wrong, don't fear mistakes, make proper bets, adjust when needed, and have patience.

I wish you all the best; thanks for everything.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.