Frequently asked questions
I just signed up, where do I log in?
There are no logins or member areas at VTS. I realize you may be used to that in other services, but I've chosen to do everything through the daily email so that people can get everything in a single place.
Every VTS daily email will have:
Section 1: All the Volatility Dashboard metrics updated just before the daily email goes out.
Section 2: The blog section which will usually include an article or video.
Section 3: All the trade signals clearly explained so you can follow any, or all of the strategies quickly and easily.
Everything you need to follow VTS is in the daily email.
What time do VTS emails go out?
VTS emails are sent out every single trading day, even when there are no trades that day.
The official time for VTS emails is they are sent out
before 12:00 pm eastern time but I often send them a little early between 11:00 - 12:00 eastern time.
In nearly 8.5 years running VTS I've never missed a deadline, so expect the VTS daily email by 12:00 pm eastern time at the latest.
What time do VTS Options emails go out?
VTS Options emails are only sent out on days when there are new trades, or closing trades.
* Expect about 8 VTS Options emails per month on average.
VTS Options emails, on days when there are new trades, are sent out before 1:00 pm eastern time so you'll have several hours to execute any positions.
I'm not getting any emails, what do I do?
If you're not receiving any emails from me, please check your junk folder
These days spam filters are getting more strict, so if there's nothing in your inbox you can check the junk folder first and approve the sender. Emails will only ever come from these email addresses depending on the service you're subscribed to:
Please approve those senders if you're having issues getting the emails.
Why am I getting multiple identical emails?
Due to spam filters becoming more strict these days, I feel it's safer if I send out both a primary email and then a secondary "backup" email as well. These will all be clearly titled for you.
Primary titled: "
Daily Trade Signals (the date)"
Secondary titled: "
Backup - Daily Trade Signals (the date)"
Please just get in the habit of reading the primary and deleting the one that says backup.
* I also have a free general VTS newsletter. Occasionally when I feel one of my daily blogs or videos is interesting I will send it to the free VTS newsletter.
These emails will always be labelled with a
specific title. Anytime you see a blog with a formal title in it, you can delete that too. Paying subscribers have already seen these.
I can't find my question in the Q&A
If you can't find your question in this list:
1) Use the search function. It's the little icon at the top right. Type in a keyword or two and see if anything comes up.
2) Email me directly and ask ( firstname.lastname@example.org )
* I will be adding to this list constantly so feel free to check back on occasion.
You have so many articles and videos, where do I start?
Apologies, I launched VTS in January 2012 and have done a daily blog every day since. This means there is a massive amount of content and it can be a little overwhelming for new members.
1) Everything I deem most important will have a blue hyperlink in the VTS daily emails. If you want to get started I'd focus on those. The strategy videos, the specialty volatility dashboard metrics, the Cash VIX Term Structure etc.
2) All my videos are on the
YouTube channel here. You can subscribe to the channel, hit the notification bell next to it, bookmark it, and start watching anything that interests you.
3) In the "Blog" section on my website, you can click
articles and see if any of those interest you.
I just signed up, do I take the trades now or wait for new positions?
Thanks for joining the VTS Community! There's two ways people general do this:
1) Start now. Since all the trades I take are optimized for the day they are given, technically every daily trade signal is actionable for that day. If you feel comfortable you can take the positions you see in the daily email and start immediately.
2) Wait for new positions. If you feel more comfortable, you can also wait for the next fresh change of position in a strategy before starting. So for example if we are currently in GLD Gold in the Tactical Balanced strategy, you could wait until the strategy moves from GLD Gold into IEF Bonds and then take the IEF Bonds trade when it happens.
* If you're signed up for
VTS Options, for those I would just wait and only take any new trades. Options trades are more time sensitive, so I wouldn't recommend taking any of the trades we have open. Wait for fresh new positions before jumping into VTS Options.
How can I upgrade from VTS to include VTS Options as well?
That's great, glad you're interested in exploring options trading as well. I do feel like it's a fantastic diversification tool for a broad portfolio, and it's more fun than regular trading as well!
Please email me (email@example.com) and let me know you want to upgrade, I can do it for you.
VTS: 80$ per month
VTS + VTS Options = 96$ per month
Do you offer an annual discount?
Yes, if you're interested in the service and really want to dive into it for a year, I do offer a substantial discount.
Annual subscription to everything, both VTS + VTS Options:
921$ / year
* Equates to 76.75$ / month, a 20% discount on the monthly subscription.
Click here to subscribe
What is the minimum capital required to follow?
As with all investing, higher levels of capital mean it's more efficient in terms of trade fees and scaling allocations.
Having said that, I do realize we all start with smaller accounts and I have made all my strategeis accessible for people trading on smaller account sizes. It's not a hard rule, but in general:
To follow VTS: Above 5,000$ it will start to become more efficient
To follow VTS Options: The model portfolio is based on a 10,000$ account, and all trades can be taken in the exact allocations on just 10,000$ in capital.
* If you have less than that, I suggest skipping the short put trades which are the most capital intensive. If you do that, it can be done on about 5,000$ of capital.
How should I allocate my capital to the strategies?
I'm not a registered advisor in your area and I can't give out any personalized investment advice. How you allocate your portfolio will depend on you and your long term investing goals.
However, my diversified
Total Portfolio Solution is what I feel is the
optimzed way to allocate and it's what I personally do. If you'd like to track my own investing as close as you can, I invite you to allocate the same way.
* These allocations do change periodically depending on market conditions, and the most up to date allocations are always clear in the daily email. Currently these are the portfolio allocations:
Do I have to follow all the strategies for it to work?
How you allocate your portfolio will be up to you, but no you don't have to follow everything I do exactly. If you're experienced and you understand the risks, you can make adjustments to match your goals.
- For example, some subscribers just follow one or both of the Volatility specific strategies (Tactical Volatility strategy and VB Threshold strategy)
- Others are more interested in traditional asset classes and will only follow the Tactical Balanced strategy and Defensive Rotation strategy.
It's up to you. I trade exactly the
Total Portfolio Solution but you can design your own ideal portfolio. Just note, the more you deviate from what I do, the less reliable the correlations may be. Smaller changes are ok, but you may want to avoid large deviations.
How long have you been managing VTS?
I launched VTS in January 2012 with the following strategies and all three have remained core positions the entire ~8.5 years.
Tactical Balanced strategy - 2012
Tactical Volatility strategy - 2012
VTS Options - 2012
There are also several other strategies that have made appearances in the Total Portfolio Solution depending on market conditions, and are always on stand by if conditions warrant their inclusion.
Aggressive Vol strategy - 2012
Conservative Vol strategy - 2012 (retired now since VB Threshold is highly correlated)
VB Threshold strategy - 2015 (currently in the TPS)
Breakpoint strategy - 2016
Defensive Rotation strategy - 2020 (currently in the TPS)
Where can I see the trade history of the strategies?
For many years I used to post that information on the website. Unfortunately I've had some issues with "copycat" services subscribing and using my signals as their own to resell. My only recourse against this is to not provide the full trade history. It's not a cure, but the combination of having no trade history, plus no ability to intelligently answer questions about navigating past environments, it's my hope that their subscribers will be unsatisfied with their answers to questions and realize it's not a legit service.
It's one of those situations where a few bad actors have ruined it for everyone, I apologize for that.
Remember, all the monthly results are on the website, and if you ever want to know anything about specific market periods, email me and I'll send you a chart of the performance over that time period and why it happened the way it did.
Where can I download the historical data for the Volatility Barometer
This is a VERY common question, and I'm happy to see it! The VTS Volatility Barometer is in my opinion the best measure of market volatility out there. I'm glad so many people want that data.
Currently, this is my proprietary information and must remain in house :)
I may release those values at some point in the future, or perhaps release time delayed values, but currently the only way to see those values is through subscription.
How do I access VTS Options?
For 8 years from 2012 through 2019, VTS Options was part of the main VTS service, it was all combined in one.
However, since VTS has been growing every year and the body of work is substantial at this point, it's become necessary to split into two dedicated services and I did that in late 2019.
Some VTS subscribers aren't interested in options trading and I don't want to overload the regular VTS emails with options content and diminish their experience.
Now that VTS Options is a separate service, I can expand the options trading discussion and really dive into the wonderful world of options!
VTS: Tactical ETF rotation strategies
VTS Options: Dedicated Options trading - Email me if you want to upgrade for 16$ / mo.
Do I need special permission to trade options?
Yes, you'll have to contact your broker and request options trading approval. Most brokers have different options trading levels.
- To trade just the Tactical Volatility strategy, the lowest level of options approval is enough. This strategy only uses long only puts and calls which is considered level 1 so any basic permission is enough. Nearly all brokers should give you this permission if you ask.
- To access the full VTS Options portfolio, you'll need higher levels of approval that include spreads and naked positions. Each broker has different requirements to be granted approval, but they tend to be based on experience. So if you tell them you've had experience trading options that should be enough.
* If you don't yet have experience, it'll take time to build it up to gain permission, so you may consider opening a
paper trading account and following along with the strategies until you do get approval for the higher level spreads.
Can I trade the Tactical Volatility strategy without using options?
The VTS Tactical Volatility strategy simulates short volatility and long volatility positions through what is called stock replacement. By using long put options and long call options, we can simulate the Volatility ETPs and make them safer and more profitable.
Short Volatility positions - We use Long VXX Put Options
Long Volatility positions - We use Long 1/2 VXX Call Options
If you don't want to use options, you can substitute those with volatilty ETPs:
For Short Volatility positions - Use Long SVXY instead
For Long Volatility positions - Use Long 1/2 VXX instead
* The 1/2 VXX means that you'll only allocate 1/2 of capital to those long volatility trades.
Using the volatility ETP replacements should accurately track the Tactical Volatility strategy with only minor differences over time.
Are the VTS Options allocations based on the options portfolio only, or the Total Portfolio Solution?
VTS Options is a dedicated service, so all allocations that I state in the VTS Options emails are for the options portfolio only.
Example, if VTS Options takes an Iron Condor trade with a 20% allocation, that means it's 20% of the VTS Options portfolio size. Any capital you've dedicated to the VTS Options service will be allocated 20% to that trade in the example.
* Now because VTS Options is only 20% of the Total Portflio Solution, a 20% Iron Condor in the VTS Options strategy would only be 4% of the Total Portfolio Solution.
Click here for an example of a VTS Options email. The trade is a 5% allocation, and it means it's
5% of VTS Options only.
Are the VTS Total Portfolio Solution results real or a backtest?
The short answer: Real since January 2012.
The long answer: I go over this in detail in this blog post here:
Real performance vs backtests
Why don't you short the S&P 500 instead of buying gold? (Tactical Balanced strategy)
Short answer: I'm only ever holding gold in the Tactical Balanced strategy during times of elevated fear and high market volatility. During these times, the performance of gold is not only much higher, but also smoother with lower drawdowns.
Long answer: I go over this in detail in this blog post:
Short S&P 500 instead of Gold?
Do you offer private coaching or one on one mentoring?
No, everything I do is community wide to help everyone as much as I can.
To be honest I'm not a believer in the "mentoring" services out there and I don't find them to be of much value for people. The vast majority are just taking advantage of people's lack of experience.
If you're looking for specific advice, you'd be better off just paying a registered advisor who is licensed to address your personal investment situation. Any "mentors" or "guru's" out there are not going to be legally allowed to offer any specific advice to you. And if they are, that's illegal. Only registered advisors in your specific jurisdiction can address your personal situation.
I manage VTS from the perspective of sharing every detail about my own trading, my own portfolio, and my own investing philosophy. Naturally it applies to a lot of other people out there as well and if you find value in it then great, but I'm not registered in your jurisdiction and can't offer any specific investment advice to you.
Fortunately, I have thousands of articles and videos you can learn from completely free :)
Can I contact you directly to speak?
Due to the fact that I'm managing a very large community, I would definitely prefer people try to get all their questions answered through the website, the articles and videos I release, and through email.
However, if you have an important issue to discuss and it can't be done through the regular channels, then yes we can set up a time to speak either through Skype, or video calls like FaceTime, Google Hangouts, Zoom etc.
When I allocate my capital to your VTS strategies, do I put 100% of my money in each trade position?
I can't give out any personalized investment advice, but if you choose to follow the VTS Total Portfolio Solution in the allocations that I detail in the daily emails, then here's how it's done.
20% Tactical Balanced strategy (MDY, IEF, GLD)
- You'll allocate 100% of the capital reserved for this strategy into the positions we take.
Example) If we are allocated to MDY, you'd put 100% of your capital reserved for the Tactical Balanced strategy into MDY. It's all capital in the trade.
20% Tactical Volatility strategy (VXX Puts, cash, 1/2 VXX Calls)
You'll allocate 100% of the capital reserved for this strategy into the positions we take.
Example) If we are allocated to VXX Puts, you'd put 100% of your capital reserved for the Tactical Volatility strategy into VXX Puts. It's all capital in the trade.
* Note, our VXX Calls trades only use 1/2 allocation size, so you'd put 50% of your Tactical Volatility capital into VXX Calls, and 50% would remain in cash.
20% VB Threshold strategy (TLT, ZIV, SPY, TLT, 1/2 VXZ)
You'll allocate 100% of the capital reserved for this strategy into the positions we take.
Example) If we are allocated to ZIV, you'd put 100% of your capital reserved for the VB Threshold strategy into ZIV.
* Note, our VXZ trades only use 1/2 allocation size, so you'd put 50% of your VB Threhsold capital into VXZ, and 50% would remain in cash.
20% Defensive Rotation strategy (VGLT, VIG, VPU)
You'll allocate 100% of the capital reserved for this strategy into the positions we take.
Example) If we are allocated to VPU, you'd put 100% of your capital reserved for the VB Threshold strategy into VPU.
20% VTS Options strategy (fully dedicated options service)
Consider this an entirely separate service, and I give full trade allocations for each position we take so you'd just allocate based on those instructions in the emails.
What are the tax implications of following your strategies?
There's three reasons why I don't address tax implications for individual subscribers:
1) I'm not a tax expert and it would be irresponsible for me to speak on what I haven't extensively studied. I try to stay in my own lane and tax law isn't my expertise.
2) VTS community members are from all over the world and naturally every country has different tax laws.
3) Even within the same country, every individuals tax situation will be different depending on their income, their job, their family structure, etc.
It would be best to consult a tax expert in your area to make sure you are getting the correct information.
If I miss a trade signal, do I take the trade the next day or skip it?
All the VTS trade signals in the daily emails are actionable on the day they are sent. That means that if you miss a trade signal, or if you're a new sign up and still in cash, it's perfectly fine to take any of the trade signals on any day that the daily email still shows that position is active.
Example: If the Tactical Balanced strategy went long MDY Stocks on the 1st of the month, and you joined on the 10th of the month and are still in cash, if the daily trade signal says "Maintain current Long MDY Stocks position" it means that even if you're not currently in the trade, you can take the trade that day.
* Now some people do like to wait for the next fresh change of position and that's fine if you prefer that. But it's also ok to take any of the trades in the daily emails on the day they are sent. Those signals are active trades to both maintain if you're in it already, or initiate it if you're not yet in it.
For VTS Options:
Because options trades are more time sensitive, if you miss a trade signal it's best to skip that trade and only take any new positions on the same day they are sent.
Can I trade your strategies in my IRA account? (RRSP account for Canadians)
You'll have to contact your broker if you have any issues with this as I'm not American and don't address specific account structures. Having said that, as I understand it:
Since VTS strategies use ETFs and long only single leg options, all the VTS strategies should be accessible in tax sheltered account types. Again though if you have issues please contact your broker.
For VTS Options:
Since some of our options trades require margin accounts, there will be several of our trades that aren't accessible in cash accounts like IRAs or RRSPs. Due to this, it would be best to follow VTS Options in non tax sheltered accounts.
* If you are experienced you could use both account types, placing trades within the IRA that are allowed, and any that aren't would be placed in non IRA accounts.
My 401k account doesn't have an option for gold, what do I do?
I'm not American and have no experience with 401k accounts so it would be best to contact your employer for assistance here, but I've had numerous subscribers mention that finding funds for gold is difficult within 401k accounts.
If you're in this situation you may consider holding bonds instead of gold. The performance won't match exactly, but both bonds and gold positions within the Tactical Balanced strategy are for safety when we don't want to be holding stocks. So you may replace gold for a broad bond market fund for that purpose.
I live in Europe and don't have access to US based ETFs due to MiFID II, KID, PRIIP regulations, what do I do?
I have a full article you can check out on this subject
(European Investing Solutions)
1) ETF replacements. You can contact your broker as there are several European based ETFs that will be suitable replacements for the US based ETFs my strategies use.
2) Using stock replacement through options is another alternative that may work. Since stock replacement involves long only options, these may be accessible for you. I have a 2-part stock replacement series here you can check out if you want to know how it's done. When you get used to it it's just about as quick and easy as buying ETFs so don't let the options component scare you.
What is the Sharpe Ratio? What does the Sharpe value mean?
The Sharpe Ratio is a metric that measures the risk adjusted return of a portfolio or strategy. By taking into account both the rate of return vs a risk free rate, as well as the standard deviation of the return, it's a way to better measure the long term effectiveness of a strategy or portfolio.
Sharpe Ratio values > 0 mean the portfolio/strategy is better than the risk free rate
Sharpe Ratio values < 0 mean the portfolio/strategy is worse than the risk free rate
* The higher the Sharpe Ratio value the better
What is the Ulcer Performance Index? What do Ulcer Performance Index values mean?
The Ulcer Performance index is a metric that measures the risk adjusted return of a portfolio or strategy. By taking into account the rate of return vs a risk free rate, as well as the standard deviation of those returns, it's a better measure of the long term effectiveness of a portfolio/strategy.
The Ulcer Performance Index ONLY uses negative returns in the standard deviation calculation, which means it's a much more useful and effective metric than the Sharpe Ratio.
Ulcer Performance Index values > 0 mean the strategy is better than the risk free rate
Ulcer Performance Index values < 0 mean the strategy is worse than the risk free rate
* The higher the Ulcer Performance Index value the better
What is Maximum Drawdown? What do Maximum Drawdown values mean?
Maximum Drawdown is a metric that measures the largest peak to trough loss for a portfolio or strategy. It is in my opinion one of the most important, yet most overlooked metric for measuring the long term effectiveness of a portfolio/strategy.
What is Correlation to the S&P 500? Why is Correlation to the S&P 500 important?
Correlation is a metric that measures how closely one asset or strategy tracks the performance of another asset or strategy. So correlation to the S&P 500 is a measure of how closely an asset or strategy tracks the performance of the S&P 500.
The S&P 500 is the largest stock market index in the world and the most widely tracked benchmark for investing performance. The problem with the S&P 500 though, like any stock market index, is it suffers very large drawdowns (losing periods) during recessions.
Investors who set up their portfolios to closely track the stock market will see their investment account do well during bull markets, and do very poorly during bear markets. This cycle of ups and downs causes long term performance to suffer greatly.
In my opinion one of the most important performance metrics is showing a lower correlation to the S&P 500, which allows investors to get off the hampster wheel and actually make long term forward progress.
How do we use risk adjusted return metrics to improve our investing results?
Understanding and using risk adjusted metrics can help investors both properly assess investing performance, as well as improve their long term investing results.
Trading strategies and structuring a portfolio to show a high Sharpe Ratio, high Ulcer Performance Index, low Maximum Drawdown, and low Correlation to the S&P 500 can greatly improve results.
What trading platform should I use? Which banks have the best software?
These days most of the major trading platforms are pretty competitive and are all going to have all the functionality you need to execute any of the trades at VTS. There's no special platform or additional requirements needed for our trades so you can just use what you're comfortable with. For me personally, I use two:
ThinkorSwim from TD Ameritrade. ThinkorSwim (TOS) is my favourite because of how nice it looks, so all the videos you see me make are using TOS. It's also very user friendly and easy to use so I could definitely recommend it to any traders out there. The analysis tools aren't the best in the industry, but I find them pretty good and definitely adequate for most people's needs. There's backtesting software, scanners, easy to use paper trading if you're a beginner trader and don't want to use live capital yet, TOS has everything you need.
Interactive Brokers. The main reason why I also use Interactive Brokers (IB) is for the cheaper commissions. Now these days even commissions are getting very competitive and there isn't as much of a difference, but I still execute some of my trades with IB. However I have to warn you in advance, their trading platform is just about the ugliest I've seen and compared to TOS and a few others, IB and their Trader Workstation looks like it was designed in 1980's. But I assure you, beyond the appearance, it's robust and definitely good enough to handle anything you need.
Can the Volatility Barometer ever get to 0% or 100%?
The VTS Volatility Barometer is a comprehensive volatility index that I created which uses many individual volatility metrics in its calculation. It is normalized to give readings between 0% and 100% depending on overall market volatility.
Can it go to 0% or 100%?
Technically, yes. Realistically, no
Let's take 0% for example which is for extreme low volatility. If all 13 of the individual metrics that are being used right now all themselves reached their lowest level in history on the exact same day, then the overall Volatility Barometer would also reach its lowest level in history and give a reading of 0%.
On the flip side, if volatility was so high that every one of the individual metrics hit their highest possible reading on the same day, then the Volatility Barometer could technically give a reading of 100%.
However, that is highly unlikely. The lowest reading ever was 13.82% and the highest reading ever was 90.55%.
Why does the Volatility Barometer only go back to 2011?
Some of the individual metrics that are being used in the Volatility Barometer only have data going back to 2006. Since the barometer is being normalized on a scale from 0% to 100%, it takes a few years for the readings to be robust enough to be effective. I've chosen to start the useful measurement period on January 1st, 2011. It can go back a little further, but I feel those readings would be less reliable.
Volatility Barometer since January 1st, 2011:
What was the lowest Volatility Barometer reading since inception?
The lowest reading ever was on July 21st, 2017 when the Volatility Barometer hit 13.82%. It's only been below 20% on 5.2% of trading days since inception, and below 15% only happens in the most extreme of low volatility environments. Now 2017 was one of the lowest volatility years on record for the S&P 500 so it's not surprising that the VB low was during that stretch as well. It'll be interesting to see how long we go before seeing another reading below 15%. Given what the economy looks like right now, it could be a while...
Lowest Volatility Barometer reading since inception:
What was the highest Volatility Barometer reading since inception?
The highest reading ever was on March 12th, 2020 when the Volatility Barometer hit 90.95%. It's only been above 80% on 5.6% of trading days since inception, and above 90% is reserved for only the most extreme volatility events. March 2020 definitely qualifies as we saw the VIX index actually surpass the levels it reached in the financial crisis in 2008. So not a surprise that the Volatility Barometer recorded it's highest level during this stretch as well.
Highest Volatility Barometer reading:
What is the VTS Volatility Barometer?
The VTS Volatility Barometer is a comprehensive volatility index that I created which uses many individual volatility metrics in its calculation to give the most robust and accurate measure of overall market volatility. These readings are very useful in timing trade entries and exits.
It's normalized to give readings between 0% and 100% depending on overall market volatility. You can learn more about the Volatility Barometer in this video:
Can leverage be added to the Tactical Balanced strategy?
Although it's not suitable for all investors, there is a leveraged version of the Tactical Balanced strategy, for those investors with higher risk appetite. Please understand though, adding leverage to a strategy will always increase the risk and the expected future drawdowns. If you've weighed the pros and cons and understand how leverage works, then you can check out this video for full details:
How do I rebalance my portfolio to the right allocations?
This will depend on whether your money is in the same account, or spread out among multiple accounts.
If your money is in the same account: In this case you don't need to rebalance because it happens automatically through what we call constant portfolio rebalancing. Because we're actively trading 2-3 times per month on average per strategy, every time you make a new trade, just buy the allocation size that matches the
percentage desired, and it will always be the right position size.
If your money is in multiple accounts: Now you'll have to do some rebalancing and there's two general methods you can choose:
Threshold method is where you rebalance everytime a specific strategy becomes too large or too small based on a chosen threshold. For example, if you intend for VTS Tactical Balanced to be a 20% allocation size, but over time it becomes 25% or 15%, then you could use that 5% difference as the threshold to trigger a rebalance. Or if you want to rebalance less often, you could do a 10% threshold.
Calendar method is where you rebalance based on a set time schedule. So maybe you could choose once every 6 months, or once per 1 year. When that time frame expires, you rebalance your accounts so they have the right amount in each by transferring some funds from one into the other to maintain the desired amount, and you'd also rebalance the strategies so each of them has the desired amount in each.
Please check out this 3 part series on Threshold, Calendar, and Constant portfolio rebalancing:
Can I program any of your Volatility Dashboard Metrics in Ninjatrader, Trader WorkStation, ThinkorSwim, or any other softwares?
Unfortunately, I have no programming ability at all so I won't be able to help you do any coding or design any automated systems.
There was a time a few years ago when I considered taking courses and learning, but I just don't have the bandwidth for that right now. I manage all my VTS strategies and my entire business with basic Excel spreadsheets which is plenty good enough for anything I need in my own work day to day.
Are the signals for the leveraged strategies the same as the unleveraged versions?
Yes, both the standard VTS strategies and leveraged version of each are materially identical as far as signals go. The only difference is the underlying ETPs and the leverage factor used.
- If the
VTS Tactical Balanced strategy is in MDY stocks, the
Leveraged Tactical Balanced will just be using 2x MDY (or MVV) instead.
- If the
VTS VB Threshold strategy is allocated to SPY stocks, the
Leveraged VB Threshold will just use 2x SPY (or SSO) instead.
All the timing signals for both the standard and leveraged versions are identical.
What does the "future roll" mean when you are calculating the Adjusted M1:M2 VIX futures and VX30:VIX roll yield metrics?
Future roll is just a term that makes sense in my head, but semantically you may hear it differently in other places. It just refers to what percentage of the VIX futures are being rolled forward every day with the rebalancing.
So let's say there are 20 trading days in the current cycle just to make the math easy. The constant maturity contract starts with a 100% weighting to the front month M1, and a 0% weighting to the back month M2. Then with each day it will be rolling 5% of its holdings forward with the rebalancing.
100% / 20 trading days = ~5% a day
If there's 19 trading days in the current cycle, then 100% / 19 = 5.26% a day
If there's 24 trading days in the current cycle, then 100% / 24 = 4.17% a day
That number can then be used to help calculate a more accurate representation of contango and roll yield, because it takes into account the weighting of each VIX future based on the number of days to expiration in the current cycle.
Where is the best place I can learn about all these Volatility Metrics that you talk about in your YouTube videos?
I think the two best resources to help you understand the basics of the Volatility market are the following:
1) The VTS Volatility Dashboard Metrics articles that are on the website:
Click the link here
2) I have a "Volatility ETP" playlist on the YouTube channel with many videos that are specific to the fundamentals of the volatility market and the various volatility products:
Click the link here
Do I have to understand all the volatility metrics you talk about in order to follow your work?
Not at all. Please don't be intimidated by all the articles and videos. Those are only optional materials for the purpose of education, but you certainly don't have to follow or understand them in order to participate and follow my Total Portfolio Solution. There's essentially 3 kinds of subscribers at VTS:
1) Follow the trade signals only. Many VTS subscribers just view me as a better alternative to traditional asset management. They get a superior portfolio with much better long term performance, while experiencing much lower drawdowns so their stress level is reduced, and they can follow at just a fraction of the cost. Since I charge a monthly subscription fee rather than a percentage of assets, the more capital a person has the better it scales with respect too fees. If a person is living below their means and consistently saving money and adding it to their investment account, over time the subscription fees reach a point where it's no more expensive than an index fund. But traditional asset management that charges a percent of assets, it's always the same headwind of fees no matter how much money they have.
2) Follow the trade signals, and read/watch the educational material with interest. Beyond following the daily trade signals, some people prefer to try to understand the methodology behind my work which is great. I'm all for that and will do my best to let you peak behind the curtain so to speak. You can watch the YouTube videos, read the articles, and hopefully I will make you a more informed investor. VTS is still about the long term performance and following the daily trade signals, but if you want to learn a little more along the way, I'll do my best to provide that for you.
3) Follow the trade signals, with the intention of becoming a self directed investor. I would imagine it's a smaller portion of the VTS Community, but some of you are probably following my work in hopes that you can learn and understand how I've achieved my success, learn what all the volatility metrics are and how they can be used, so eventually you'll be ready to take the reins yourself and invest your own money. If this is your intention, I'm 100% on board with that as well and I will help you as much as I can.
* All videos, articles, and daily blogs are optional only and you're under no obligation at all to look at any of it. If you'd rather just take a few minutes a day and just follow the trade signals, that's just fine. You can mirror my portfolio and focus on things in your own life :)
Can I get in touch with other VTS Community members?
Out of respect to everybody's privacy, I won't ever divulge a single piece of their personal information. For this reason, no it won't be possible for you to directly speak to any other members.
I realize there's several reasons you'd be asking this and all are fairly benign. Maybe you just want to hear from someone who has had experience with VTS before you make a decision. Perhaps you want to pick the brain of someone specific to the country you live in. Maybe you want to talk to someone who uses the same broker you do. I can think of several reasons why you'd be asking this question.
But privacy has to be respected, so all information on VTS Community members will forever remain private.
The strategy I saw mentioned in a past video / article doesn't seem to be on your website anymore. Where is it?
Due to the fact that markets change over time, it's necessary for me to adapt my portfolio to best match the current market environment and put forward the portfolio allocations that I feel have the highest probability of success. For this reason, the strategies that are officially included in the Total Portfolio Solution will change over time.
- Something that may have been included in the portfolio in the past may no longer be suitable too today's environment. The
Conservative Vol strategy is an example of that. I feel the
VB Threshold strategy covers all the same bases, but is more suitable for the market going forward.
- We also have to be open to introducing new strategies that are better designed to handle a specific market, or perhaps add a level of correlation / diversification that will improve results. The
Defensive Rotation strategy is an example of this, where it adds a level of positive S&P 500 correlation that better handles this cycle of market crashes followed by steep and fast recoveries that we've been in for the last few years.
* This however does not mean we change portfolio allocations often. In fact, I mostly just allow myself a once annual audit of the strategies and the market at the end of the year, and make any changes only once per year at most to see if a better combination might add more value. And, we've gone several years where no changes were made at all so I don't mean to imply we adjust the portfolio often. We don't, in fact it's quite rare.
Does your performance record include trade fees?
Yes, since 2012 I have been adding a 5$ per trade and 0.50$ per option contract commission to the record. However, since the last few years has seen a race to the bottom as far as commissions go, I may at some point reduce that to a more realistic number since in 2020, nobody should be paying 5$ per trade anymore. But yes the official trade record since January 2012 does include trade fees.
The VXX / UVXY is not tracking the VIX index. Are these volatility ETPs broken?
Although the VXX / UVXY and the VIX index do have a long term correlation, it's very important to remember that they are totally independent of each other and often times deviate substantially in the short to medium term.
Volatility ETPs derive their price based entirely on VIX futures
The VIX index derives its value entirely on the S&P 500 options market
VIX options and the S&P 500 options market are both independent freely traded markets, so it's perfectly normal to see short term deviations between volatility ETPs and the VIX index.
For more information on this subject you can check out this video:
If trades are up money quickly, do you take profit early or do you just stick to the signals?
The short answer: No I don't use stop-gains or take profit early. I follow the rules of the strategies and the daily signals. I'm quant based and follow the math, not personal predictions or intraday market timing.
The long answer: There's few things that mess with our minds more in trading than seeing positions that are up a lot of money, suddenly start failing and end up being losers. Psychologically, that type of pattern from a winning to a losing position is much more memorable than say a trade that was losing initially and turned out to be a winner, or a trade that just started losing slowly and gradually went to stop-loss. There's just something about the "up quickly only to lose money eventually" type of trade that gets burned in our memories.
But I suspect if you were to keep track of all your trades, you'd realize that losing trades turning into winners happens just as often. I basically chalk it up to a 50/50 long term wash. So for me,
I have a plan when I first enter the trade and I stick to it.
The other reason we can't use early stops is because we can never know ahead of time when we are in a really good trend that will last for a while, vs when we will see one of those very frustrating reversals. We don't want to take profit in a trde for say a 5% gain, that was going to go on to make 10-15% or more.
My strategies are mostly trend following, so the last thing we want to do is cut off the tops profit wise of all the trends. Locking in small wins wouldn't nearly be worth it, because we'd be capping or potential for larger outsized wins, which do happen sometimes, that's the goal of trend following.
Here's a list of the largest single trade returns within just the Tactical Volatility strategy. All our other strategies are trend following as well so the same concept applies. We want to let those winners run when we get them.
You mentioned your Total Portfolio Solution used to be 3 strategies with a 50/30/20 allocation. How has that done compared to the new portfolio?
When I first launched Volatility Trading Strategies in January 2012, the Total Portfolio Solution had the following allocations:
TPS in January 2012:
50% Tactical Balanced strategy
30% Tactical Volatility strategy
20% Iron Condor strategy (options trading)
TPS in 2020:
20% Tactical Balanced strategy
20% Tactical Volatility strategy
20% VB Threshold strategy
20% Defensive Rotation strategy
20% VTS Options (dedicated options service)
So we still use all the same strategies I launched with, but in the past 9 years I've added a few more strategies with the intention of increasing the potential profit while reducing drawdowns. So how have I done?
Below is a backtest comparing the current 5 strategy 20/20/20/20/20 allocation, with that old 3 strategy 50/30/20 allocation:
The fundamental principles of the Total Portfolio Solution haven't changed. We use a multitude of volatility metrics to guide our purely systematic strategies, with the key feature being the tactical rotation out of risky positions and into safety positions when markets warrant it.
The only difference is, we now do it across 5 strategies instead of 3, which adds diversification while still adding potential for higher profit.
VTS hasn't changed much in the last 9 years, but in my humble (and obviously biased opinion) the small changes I have made are for the better. Long term, our current more diversified portfolio should outperform the original.
Is it safe to sell naked call options on VXX or UVXY?
I will likely dedicate another full video to this topic and I'll post it here when I do. Until then, spoiler alert, I wouldn't recommend naked options on Volatility ETPs to anyone.
"Everyone has a plan until they get punched in the face" - Mike Tyson
Everyone thinks they have risk management adequate enough to protect against adverse market conditions. But the market has a funny way of doing things that have never happened in quite that way before.
It's not inconceivable that a future event, like a flash crash of epic proportions for example will come along. If that were to happen, no amount of risk management or nimbleness in the moment will be good enough.
I believe it would be in the best interest of all investors to assume one of those events is a certainty, and invest accordingly. That would mean:
1) Always stick to defined risk trades.
2) Not using excessive levels of leverage or margin.
3) Always diversify the portfolio no matter how successful an individual strategy may be.
* Selling naked calls on Volatility ETPs would obviously violate these precautions
None of us know what the future holds. If you always invest "as if" one of those terrible events is a certainty in the near future, then you should be fine. It's like a constant stress test on your portfolio.
What would happen if there was a flash crash and the market dropped 10% tomorrow? If you would be able to handle that, then you're good.
Which strategies use the VTS Volatility Barometer directly to generate the trade signals?
The strategy allocations of the Total Portfolio Solution do change from time to time depending on market conditions, but currently it's made up of 5 independently traded strategies:
20% Tactical Balanced
20% Tactical Volatility
20% VB Threshold
20% Defensive Rotation
20% VTS Options
However, if all of them were using the same input variables then they would move very close to one another and it would not be as diversified a portfolio. So all of them are specifically designed with their own set of indicators and thresholds, meaning they are all different in both the asset classes used as well as the timing behavior due to different indicators.
* Among the 5 strategies in the TPS,
only 1 directly uses the VTS Volatility Barometer.
The VB Threshold strategy takes the daily Volatility Barometer reading and uses that as a direct input to generate the trade signal for which asset class we will be holding at the time.
All the other strategies use their own array of asset class holdings and importantly, their own individual set of indicators. This is one of the contributing factors as to why the Total Portfolio Solution has managed drawdowns so well for so long. It's true mathematical diversification, not just a portfolio that sounds different.
Instead of trading VXX options in your Tactical Volatility strategy, can I replace that with VIX options instead?
Unfortunately, VIX index options are not an appropriate replacement for VXX options or any of the volatility ETPs. Because the VIX index is a statistic, not a tradable index, it's impossible to replicate positions that will have similar characteristics. Long VIX Puts or Calls, or VIX Vertical spreads, will not move in the same fashion or with the same risk reward profile as the volatility ETPs.
- VXX and all the volatility ETPs derive their price based on VIX futures
- The VIX index is a cash index that is not directly tradable, and derives its value based on S&P 500 options
So while there is a long-term correlation between the VIX index and VXX, unfortunately they aren't close enough in their movements or their risk profile to be a suitable replacement.
For those who don't want to use options, I suggest the following simple replacements:
- Instead of VXX Puts, use long SVXY instead
- Instead of VXX Calls, use a 1/2 position size in VIXY
When your Tactical Volatility strategy is in a "cash" position, do you literally leave the money in cash or do you invest it in a stable lower yielding money market fund?
Among the 4 tactical rotation strategies currently in the Total Portfolio Solution, only one of them ever takes cash positions. It's only the Tactical Volatility strategy that does have the safety position of "Cash" whenever the market signals are too ambiguous and we aren't committed to either short or long volatility.
When we are in cash, that does literally mean cash. We just keep that capital that's allocated to the strategy on the sidelines and in cash, ready to apply to future trades when the signals allow it. There's a couple reasons for this:
1) We don't know when the next trade will be, so the money needs to be available on a moments notice just in case that's the day the signals change and we are moving into a volatility position.
2) With interest rates where they are these days, the expected increase in return of holding a money market ETF instead of cash is so low that I personally don't feel it's worth the trouble. Especially after we factor in the additional trade fees, it will probably end up costing more than the ETF makes.
* The following is showing the performance of the VTS Tactical Volatility strategy, vs what it would lookin like if someone entered SHV instead of Cash.
As you can see, a very small difference, and if we were to factor in trade fees it would very likely be a little lower than the standard strategy using cash. So for me personally I just prefer keeping the money in cash and having it ready and accessible when we do get the signal to allocate to a position.
Why are the volatility metrics in your daily emails different than the values I see online?
I compile all the data for the VTS Volatility Dashboard right before I send out the daily email so everyone has the most up to date information. That means that the data I'm including in all the daily trade signal emails will not match up exactly with the end of day prices you are seeing in your trading software.
- I compile all the volatility data around 11:00 am eastern time
- I send out the VTS email around 11:30 am eastern time
So we are essentially using the most up to date
intraday data for our trade signals, which will be slightly different than the end of day data that you find online.
In the VTS Volatility Dashboard, what does the first column "Short Vol bias" mean?
Here is the "Specialty" VTS Volatility Dashboard for October 2nd, 2020:
That first column labelled
"Short Vol bias" is showing in what range that specific metric points to a more advantageous environment to go short volatility.
Lower means when that indicator level is low, that's a better time to be short volatility
Higher means when that indicator level is high, that's not a good time to be short volatility
* Also, short volatility and long the stock market can be viewed as similar positions, so the Short Vol bias can also mean Long stock market bias.
And we do also have a General Volatility Dashboard with many more volatility metrics included in the daily trade signals emails.
In the VTS Volatility Dashboard, what does the third column "Percentile rank" mean?
Here is the "Specialty" Volatility Dashboard for October 2nd, 2020:
That third column labelled
"Percentile rank" shows where the current value is ranked in relation to all other values of the past back to inception.
Example) You can see the first metric in the table above is the VTS Volatility Barometer, with a percentile rank of 74.20%. That means the current level of the VTS Volatility Barometer is higher than 74.20% of all values going back to inception in January 2011.
Percentile rank is a very useful way of showing in a single value where the current level ranks compared to the past.
- Lower percentile rank means the current value is historically low compared to all previous values.
- Higher percentile rank means the current value is historically high compared to all previous values
* And we do also have a General Volatility Dashboard with many more volatility metrics included in the daily trade signals emails.
In the VTS Volatility Dashboard, what does the forth column "Long-term median" mean?
Here is the "Specialty" Volatility Dashboard for October 2nd, 2020:
That forth column labelled
"Long-term median" shows what the absolute middle value is in the entire history of that specific metric.
Median is calculated by ordering a series of values, either from low to high or high to low, and then identifying the absolute middle value. That middle number is called the median.
Example) If we order the following series of 9 values: 2, 2, 3, 4,
6, 7, 7, 8, 9 we can see the middle number in that series is 6, so the median value of that series is 6.
So in the table above, the VTS Volatility Barometer has a Long-term median value of 41.69%. That means exactly half of all values going back to inception in January 2011 have been higher than 41.69%, and exactly half of all values have been lower than 41.69%. The current value of 60.33% is higher than the long-term median, meaning we are currently seeing elevated market volatility, above the long term median.
* And we do also have a General Volatility Dashboard with many more volatility metrics included in the daily trade signals email.
Can I just sell way out of the money call options on UVXY to collect premium because the price won't get to the strike by expiration because it's so far out of the money?
This is always tempting for newer traders, but it's a very dangerous trap that will almost certainly lead to disaster eventually.
Options don't work based on expiration prices, they actually change value constantly throughout the life of the contract. So even if you opened a UVXY short call that is so far out of the money that it's unlikely to ever get to that price, that doesn't mean you can't still lose massive amounts of capital in the interim.
All option trading should be viewed dynamically, in the moment, with the daily gain/loss curve as the only thing you focus on. It's best to just ignore the expiration strike prices because those aren't relevant to the trade day to day.
Don't ever make the mistake of thinking: "Oh I can just sell way out of the money options and it'll never get there." While it's true that it may not get to the strike price, remember it doesn't have to. It could still be an extremely painful drawdown that forces you to close the trade early for a big loss anyway.
Plus, the reason there is still premium in those way out of the money options is because large standard deviation moves do happen in the market from time to time. If they didn't happen, there wouldn't be any premium in those way out of the money strikes to sell. If it was statistically impossible, the premium would be 0$.
The fact that there is meaningful premium in those strikes to sell means at some point, it will get there in a rare market move. On a longer time horizon it's almost guaranteed to get there. Then it's "rogue wave" time (Google optionsellers.com)
The problem with selling way OTM puts and calls is that you can have many winning trades in a row, perhaps several months or even a year straight of winning trades. You'll be lulled to sleep thinking it's easy money. Then all of a sudden the market will do something unexpected and you'll lose all your gains plus more in a cascading failure.
If you want to sell premium, do it in very conservative amounts and much closer to the money. If you sell near the money options and do it fully cash secured, meaning you reserve the full notional value for the trade, it's a safer way to scale your trade correctly and still collect meaningful premium.
Selling way out of the money strikes is a rookie trap! We call that
"picking up pennies in front of the steam roller" for a reason.
Do you have a "Business Continuity Plan" in case the daily email doesn't get sent out?
In 9 years managing VTS I've never missed an email, and only once it's even gone out late which was 17 minutes. So if you don't get a daily email you can consider the following:
1) It's probably in your junk folder. Spam filters are getting pretty strong these days, and since I'm sending out the email to a large number of followers and group emails can be flagged, it probably ended up in junk. Check there first, and click "not junk" if it is.
2) Since I've never missed a day, if you don't get an email it may indicate something is wrong. It could be something serious like an illness or accident (knock wood) but it could also just be a power outage or internet blackout. I'm not implying it would be anything terrible, but it could be, so you could consider the following:
a) Do nothing. If you're comfortable with your current positions given the market, then you could just maintain all positions from the previous day and see if I contact you the next day.
b) Move to cash. If we're in positions that make you feel uncomfortable given current market conditions, there is absolutely nothing wrong with moving 100% to cash and waiting for more clarity.
Very likely if I did miss a day I would find a way to contact everyone and explain what happened as soon as possible. Assuming I was conscious, even in the hospital I would find a way to get a message out. And if it was a power outage I would try to find my way to somewhere that I could get an internet connection.
Depending on your comfort level of the current positions,
you'd either maintain all positions or move to cash and wait for clarity. Either way works, but remember that one day in cash isn't going to have any effect on long term performance so you could default to that one as the safer choice.
Is it possible to send out the daily trade signal emails earlier? I'm in another time zone and would like them sooner if possible.
I'm always proud of the fact that we have VTS subscribers from over 60 countries worldwide, it's amazing! But unfortunately that also does mean that for some people the daily trade signal emails won't be coming at the most convenient times.
* Unfortunately, I can't send them out any sooner.
I have to wait at least an hour and a half after the markets open in the morning before entering all of my volatility metrics data. That first hour or two of trading can be quite choppy, and if I compile the data any sooner than I already do, it would compromise the robustness of the signals due to the added possibility of whipsaw in the early part of the trading day.
I do apologize if this means it's not as convenient for you to follow the signals, hopefully you can find a way to make it work.
The VB Threshold strategy has done very well over the years, but it seemed to have a bad year in 2019. Any specific reason for that?
The poor performance of the VB Threshold strategy in 2019 was mostly due to several long volatility VXZ positions that went poorly. We only enter long volatility when the Volatility Barometer goes over 80%, and it did flash in that range a few times in 2019.
The problem was, the old "buy the dip" mentality was in full effect at that time in the market, and it was just uncanny how many times we entered long volatility only to see the market bounce strongly within a few days.
We got hit several times with losing trades on the long volatility side of things. Now in the long run those trades do pay off, because when there is an extended market downturn they can be quite profitable. In the short run though it can be quite frustrating when the market has those strong reversals, and 2019 was harsh on our long volatility trades within that strategy.
VB Threshold strategy though October 2020:
Given interest rates are near zero again, is it even worth it to hold IEF (7-10 yr treasury ETF) positions anymore within the Tactical Balanced strategy?
The very short answer is yes, but I have a full article going over this topic in detail below.
Click here to view the article
If I miss a VTS Options trade the day it's sent out, can I still take it a few days later?
I've answered a question like this for the main VTS tactical rotation strategies and the answer for those ETF strategies is, yes the trades can be taken on any day the signal is still active.
But for options trading within VTS Options,
the answer is no.
Options trades are more time sensitive and I would prefer people open and close the trades on the same days the official VTS Options emails go out. If you miss one, just skip it and wait for the next fresh new trade.
There are several every month so it's not a big deal if you miss past trades. Just pick up on the new signals as they come out in the emails.
Do I take the trade signals as soon as I see the daily email, or do I wait until market close?
This is entirely up to you. I send out the daily trade signal emails before 12:00 pm eastern time so you'll have plenty of time throughout the rest of the day to execute trades.
1) You could execute your trades when convenient throughout the day after you see the email. There's no way to effectively time intraday prices, so the fill prices we get are pretty random for those 4 hours. But in the long run it will all average out the same. Some days you'll execute for better prices, and other days worse prices. In the long run, it'll all average out.
2) I personally execute my trades at market close, and the official strategy performance is also done at market close so if you want you can do this as well. Now this is just personal to me and my style, so you don't have to follow this if you don't want.
Here's why I execute trades at market close:
Can we use silver (SLV) instead of gold (GLD) within the Tactical Balanced strategy?
The gold positions within the Tactical Balanced strategy are only taken when market volatility is in its highest range. It's meant to be a safety position for when it's too risky to be holding stocks. Gold has done a pretty good job of this over the years, but due to the inconsistent nature of gold as an asset class, those positions can still suffer significant drawdowns.
For example, during the financial crisis the Tactical Balanced strategy was in gold for a significant portion of that crisis. Now on a relative basis it did much better than the broad market. Those GLD gold positions had a drawdown of about -20%, where as the broad market crashed over -55%. So even though it did substantially better and was well worth holding gold, a -20% drawdown is still significant. So you wouldn't want to do anything with those positions that could potentially increase the drawdowns even more than they already are at risk at with gold.
Silver as an asset class is even more inconsistent than gold is, and when gold is down, typically silver is down even more. So I would not recommend replacing gold for silver.
You can see those results below where I compare just the GLD Gold holdings within the Tactical Balanced strategy, vs holding SLV silver instead. As you can see, performance wise it's a little worse, and with much larger drawdowns.
Can I use VXX instead of VIXY in the VTS Aggressive Vol strategy?
VXX and VIXY are materially the same, they track the exact same underlying (SPVIXSTR). This chart has both VXX and VIXY plotted on it, and you'll notice they are almost identical.
* So you can use VXX and VIXY interchangeably in the strategies depending on which you prefer.
The reason I use VIXY for the VTS Aggressive Vol strategy is because we are already using the VXX within the VB Threshold strategy. I try to use different underlying ETFs for each of the strategies within the diversified Total Portfolio Solution so that it's easier for people to trade all the strategies within the same account.
If we use the same ticker for multiple strategies it becomes more complicated to track which shares are for which strategy. Now sometimes it's unavoidable as we have a limited number of different ETFs out there, but it's just much easier to make sure we are using different tickers
whenever possible. In this case it's very easy, as VXX and VIXY are identical.
Can I use UBT instead of TLT in the Leveraged VB Threshold strategy?
The VB Threshold strategy has 2 of the 5 sections that are allocated to TLT, and both of them are what I would consider "safety" positions. There is some added performance coming from those sections, but they are largely meant to park capital when the market is too risky:
TLT = 20+ year US Treasury ETF
UBT = 2x leveraged 20+ year US Treasury ETF
So the question is, why not use the 2x leveraged UBT?
With interest rates so low these days, I prefer to keep my bond holdings to be "safety" holdings only, and not try to chase extra return in those sections. Perhaps if the Fed stops meddling in the market in the coming years I will revisit this, but for now I prefer to just stick to the 1x TLT product.
The Leveraged VB Threshold strategy has the bulk of it's performance coming from the stocks (SSO) short volatility (2x SVXY) and long volatility (1/2 VXX) positions so I prefer to focus on those. The bonds (TLT) positions are just for safety.
* Now as always, you can adapt my strategies to fit your own level of risk tolerance. If you prefer to use UBT instead of TLT to try to chase a little higher return, that's fine. Just understand that it will very likely come with higher drawdowns, so make sure it fits with your risk tolerance.
Can VXX be used to hedge my long stock portfolio?
Yes VXX is quite a common hedging tool in the investing world. Now full disclosure, I don't do any hedging at all in my portfolio. All my individual strategies have methodologies to shift out of aggressive positions and into safety when risk elevates, so I'm probably not the best person to ask about hedging.
Having said that, if I were to try to use VXX to hedge my long portfolio, there's a couple input variables that you'll need:
1) You'll want to determine the long term
beta of your overall portfolio to the S&P 500. Beta is a measure of how much asset A moves in relation to asset B. So you'll want to determine how much your portfolio moves in relation to moves in the S&P 500. Is it 0.5x when SPX moves 1%? Is it closer to 1:1? You'll need a reasonably accurate assessment of the movement of your historical returns.
2) You'll also need to know how much the VXX moves in relation to the S&P 500, the VXX beta to SPX. The chart down below shows the SPVIXSTR index beta to the S&P 500. All the volatility products track the
SPVIXSTR index in various leverage factors. VXX is 1x that index. UVXY is 1.5x that index on a daily basis, etc.
* Note: VXX is not 100% inversely correlated to the S&P 500, it's actually around 75%, so using VXX to hedge a portfolio will have some tracking differences where sometimes it will work very well and other times it may deviate a little, hedging more or perhaps less than you intended. With indirect hedges, it's not an exact science, you just get as close as you can with comparing the long-term averages of beta and go from there.
Once you know your
portfolio beta to SPX and
VXX beta to SPX, you'll just have to calculate the right scaling factor for how much you want to try to hedge out. Obviously not all or there wouldn't be any room for gains, but at what percentage do you want to scale those hedges?
Dynamic hedging: There is also the possibility of using dynamic hedging, where you only start scaling into hedges when overall market risk is rising. For this, you
may want to consider using my
VTS Volatility Barometer as the tool to measure risk.
For me personally, when the Volatility Barometer is in the 60-65% range, that signals risk and it's when my strategies start moving out of aggressive positions and into safety positions and cash. So a person using VXX to dynamically hedge,
may start accumulating their hedges around that range as well.
SPVIXSTR beta to SPX:
What is our current Portfolio : SPX Beta?
Beta measures how much one security moves in relation to another. What I've done is create a table showing all our strategies and their respective Beta factors to the S&P 500 so we can always see how much exposure each of our portfolio's currently have. It looks like the table below and it's included in every VTS Daily Trade Signals email:
This article will give a full explanation of Beta, what it it means, how it's used, and how that relates to our portfolios:
Click here for the full article explanation:
Why is the Tactical Volatility strategy Beta : S&P 500 lower than the VXX?
- The long-term VXX : S&P 500 Beta is about -2.35
- The Tactical Volatility strategy : S&P 500 Beta is about 1.41
The reason these two numbers are different is because the Tactical Volatility strategy buys long dated VXX put options rather than shorting the VXX ETF directly. Those VXX Put options move slower than the actual VXX does because we are selectiong options with an average Delta factor of 0.6
Delta measures, all other things being held constant, how much an option will change value with respect to movements in the underlying.
Since the Tactical Volatility strategy is trading options with an average 0.6x Delta, that will mean that the Tactical Volatility strategy : S&P 500 Beta will be 0.6x the true Beta.
-2.35 x 0.6 = 1.41
If I don't use the Vol Trend strategy, what allocations should I use instead?
I can't make any personalized investment advice, but in general if the Vol Trend strategy is removed the allocations that make the most sense from a correlations and diversification perspective would be:
30% Tactical Balanced (or Leveraged Balanced)
20% Tactical Volatility (or Aggressive Vol)
20% VB Threshold (or Leveraged Threshold)
30% Defensive Rotation (or Leveraged Defensive)
I won't ever over-allocate to volatility strategies even if they are going through periods of great success so I personally wouldn't increase those allocations beyond the 20%. That means the additional allocation should go to Balanced or Defensive depending on your personal goals. In general we can say:
Tactical Balanced will likely have lower absolute performance but also will have lower drawdowns.
Defensive Rotation has the potential for higher return, but it will also come with higher drawdowns during market downturns. You'll have to weigh which is more important to you.
Do you look at the US yield curve for trade signals?
While I do check it regularly for interest sake, I don't find any value in it for investing purposes or trade signals as it reacts far too slowly for that. My entire investing philosphy is based on tactical rotation, staying nimble with my portfolio, and having the ability to rotate out of aggressive positions and into safety positions on a 1 day notice if necessary.
Volatility metrics, especially the way I use them with rankings and relative strength react very quickly to market changes which is why we are able to rotate into safety so quickly when trouble arises. The yield curve can take several months or even a year before those warning signs actually materialize in the stock market.
If you want to know more about the "yield curve" and more specifically what the famous "inversion" signal is you can check out this article called
What is US Treasury yield curve inversion?
What day of the week does UVXY decay the most?
Watch the clip on YouTube:
Can you do a video on backtesting complex strategies?
Watch the Clip on YouTube:
I don't hedge my portfolio. I start with safety, then add the risk
Watch the Clip on YouTube:
Are you a CTA? Do you need College to manage a fund?
Watch the Clip on YouTube: