Short Volatility during rare spikes using leveraged ETF $UVXY
Overview
Volatility represents how greatly an asset’s prices swing around the mean price. Historically there are rarely brief volatility flare-ups that present trading opportunities. Trying to anticipate volatile events can be costly, because other market participants generally expect the same well known events, and one never knows how big a volatility spike might arise from a given event. Instead if one merely awaits extreme volatility events, which historically are ephemeral, there's a higher probability trade in shorting it. I've thought about this previously, and took the opportunity with Liberation Day to successfully short volatility.
Volatility Instrument Selection
Choosing an appropriate instrument can aid in the likelihood of a successful short position. Among the options
UVXY looks attractive for the trade, because it's a leveraged ETF, is highly liquid, and provides options with granular strike prices and expiration dates. Leveraged ETFs are known to decline over time due to
These characteristics of leveraged ETFs provide a structural tailwind to a short position, because the instrument naturally declines over time. This phenomenon easy enough to see on aUVXY weekly chart 
Moreover selection of a liquid product is prudent. At the time of writingUVXY has an average daily volume north of $22 million dollars for the past 30 days.
Trade execution
Execution of the trade starts with recognition of a highly volatile event, this is both technical and discretionary. From there a trader is advised to use their preferred tactics to select entry, stop-loss and exit points. Personally I like to use chart patterns across different timeframes in tandem with Relative Strength Index, and to a lesser extent volume to identify trading setups. I use longer term charts to identify a trend, and shorter timeframe charts to determine entry and exit points. The timeframe(s) depend on the particular instrument and what the charts look like at the time of the trade.
During the Liberation Day Volatility Short trade, I've been using 1W, 1D, 4H and 1H charts.
The 1H chart has been suitable for entering an exiting trades. Head & Shoulders patterns have manifested both on price and momentum alongside declining volume. I've posted a coupleUVXY minds along the way.
Additional Thoughts
Volatility can also be used generally to anticipate moves in other asset classes, such as stocks, bonds, crypto and commodities. Using the levels from that last chart fed into successfulTQQQ & SQQQ trades in the aftermath of Liberation Day.
Volatility represents how greatly an asset’s prices swing around the mean price. Historically there are rarely brief volatility flare-ups that present trading opportunities. Trying to anticipate volatile events can be costly, because other market participants generally expect the same well known events, and one never knows how big a volatility spike might arise from a given event. Instead if one merely awaits extreme volatility events, which historically are ephemeral, there's a higher probability trade in shorting it. I've thought about this previously, and took the opportunity with Liberation Day to successfully short volatility.
Volatility Instrument Selection
Choosing an appropriate instrument can aid in the likelihood of a successful short position. Among the options
UVXY looks attractive for the trade, because it's a leveraged ETF, is highly liquid, and provides options with granular strike prices and expiration dates. Leveraged ETFs are known to decline over time due to- Daily rebalancing and compounding effects
- Volatility drag
- Cost of leverage
- Management fees and expenses
- Path dependency
These characteristics of leveraged ETFs provide a structural tailwind to a short position, because the instrument naturally declines over time. This phenomenon easy enough to see on a
UVXY weekly chart Moreover selection of a liquid product is prudent. At the time of writing
UVXY has an average daily volume north of $22 million dollars for the past 30 days.Trade execution
Execution of the trade starts with recognition of a highly volatile event, this is both technical and discretionary. From there a trader is advised to use their preferred tactics to select entry, stop-loss and exit points. Personally I like to use chart patterns across different timeframes in tandem with Relative Strength Index, and to a lesser extent volume to identify trading setups. I use longer term charts to identify a trend, and shorter timeframe charts to determine entry and exit points. The timeframe(s) depend on the particular instrument and what the charts look like at the time of the trade.
During the Liberation Day Volatility Short trade, I've been using 1W, 1D, 4H and 1H charts.
The 1H chart has been suitable for entering an exiting trades. Head & Shoulders patterns have manifested both on price and momentum alongside declining volume. I've posted a couple
UVXY minds along the way.Additional Thoughts
Volatility can also be used generally to anticipate moves in other asset classes, such as stocks, bonds, crypto and commodities. Using the levels from that last chart fed into successful
TQQQ & SQQQ trades in the aftermath of Liberation Day.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.