27% profit every 20 days?
This is what Nic Chahine averages with his option buys. Not selling covered calls or spreads… BUYING options. Most traders don’t even have a winning percentage of 27% buying options. He has an 83% win rate. Here’s how he does it.
Since volatility is often viewed as being a bad thing and having a negative correlation to equities and other riskier assets, the timing could be right for the iPath S&P 500 VIX Short Term Futures TM ETN (NYSE: VXX) and rival exchange-traded notes (ETNs), such as the once notorious Credit Suisse AG - VelocityShares Daily 2x VIX Short Term (NYSE: TVIX).
Indeed, global equity markets are delivering plenty of volatility this year. At least that is the perception among many investors. However, it is hard to tell when examining traders' treatment of volatility exchange traded products, such as the aforementioned TVIX and VXX. Despite what appears to be a strong case for VIX ETNs, traders are currently applying restraint when it comes to these products.
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Volatility In The Not-So-Distant Past
Volatility has been on the rise this year, but it still has not reached the levels seen in 2011 when global investors were fretting over the possibility of Greece being booted from the eurozone.
“Another subset of investors is doing the opposite and taking the volatility head on in the hope of profiting from a return to calmer times, using volatility ETFs. While the implied volatility of the S&P500 as tracked by the VIX index itself is not directly investable, investors can mirror its movements by investing in one of 59 ETF products that track it,” said Markit in a recent note.
As Markit noted, those 59 volatility products manage a combined $4.3 billion in assets under management. That is not chump change, but it is a mere pittance relative to the total combined assets under management for U.S. exchange traded products, which is over $2 trillion. What is interesting is that inverse volatility products account for a quarter of the genre's combined assets. And it is inverse volatility products that traders are favoring this year.
Trader Sentiment
For example, the Credit Suisse AG - VelocityShares Daily Inverse VIX Short Term ETN (NYSE: XIV) has hauled in more than $277 million in new assets this year while VXX has bled more than $232 million.
“The purchase of units of inverse volatility ETFs implies that the buyer expects recent increases in volatility to decrease, reverting lower towards its mean level. Thus increased volatility in markets induces investors who are confident in calmer markets prevailing, to direct funds towards products providing returns as volatility decreases,” according to Markit.
Past bouts of market volatility show that the current treatment of volatility ETNs is not unusual. Traders usually pile into an ETN such as VXX anticipating rising volatility, take profits on the way up and move into a product like XIV in anticipation of ebbing volatility.
Image Credit: Public Domain27% profit every 20 days?
This is what Nic Chahine averages with his option buys. Not selling covered calls or spreads… BUYING options. Most traders don’t even have a winning percentage of 27% buying options. He has an 83% win rate. Here’s how he does it.