Shooter VXX journal - Short volatility without blowing up?

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shooter

Hello all,

I've been reading a few blogs about trading etf's, volatility and such. Decided to try a simulated VXX journal, basically short VXX and hedging at intervals on the way up. This is basically trying to profit from short volatility without blowing up...I understand many have gone this path and still ended up being carried out on a stretcher, so I'm trying it simulated first.

Frankly, I don't know what value that would have as it would seem to me that the scariest part of short volatility is the 'unknown unknown'. Meaning, whatever I simulate trading going forward, the true risk to short vola may be something we've (I've) never seen before. But, if this was profitable going forward, I would at least need to simulate the dynamics of it in a normal environment.

I've never backtested this statistically...please don't slap your forehead or my mine after reading that :) But a crude look at a VXX chart (or a S&P Short term index chart, or a constant maturity VIX future chart, fwiw) shows the mean reverting nature of volatility.

It would seem to me that the key is managing the drawdown without blowing up first. Then, second, managing the interval of hedges. Being whipsawed on the hedges would eat up gains. Third, carry fattail risk (out of the money calls?).

That's a rough draft, the devil is in the details that I'd have to figure out in simulation. If any more experienced guys can shoot down this idea before I get started, I'd appreciate it so I don't waste time. Thanks for reading.
 
The more I think about it, I'd really only learn anything about this idea with VIX over 20, overnight jumps/gaps, just a tough environment in general. Kinda like how they say you only learn about your character when you are down.

VIX has been low for a prolonged period of time, maybe we'll be in store for a volatile 2nd half of the year?

First simulated trade, I bought a VXX synthetic short and a couple out of the money calls for black swan risk. I'll figure out how to post a screenshot.
 
update, I'm running this live in small size (2 lot) to put real money at risk. Screenshot attached. Looking to hedge north of 16.21 on VXX. My initial thought was to hedge in intervals, say, 75, 75 and then 50 shares, but for now I plan on trying all in, all out (200 shares). May get volatility with the data coming out, which would put the hedge into effect....hopefully?
 

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In the screenshot you also see long 2 Oct 26 calls - that's my OTM fat tail risk hedge. There are also long 20 VXX shares, which are just a minor outright position, which I plan to take off on a good volatility spike.
 
Decided to switch back to my original idea of hedging at intervals, i.e. 75, 75, and then 50 shares, just to test hedging and whipsaw.

Updated marks at 10 AM, unrealized p/l +$32.
 

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Huge intraday move on the back of the Fed, mark to market +$107. Almost tempted to buy more VXX shares here, but I'll hold my breath.


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Late Friday I doubled up risk reversal, doubled up on otm calls (bought 23 strike), doubled up on 'speculative' vxx long shares. Moving interval hedge levels lower, may get some triggered this week with Fed speak? Unrealized at +280.

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Today I realized, looking at the grand scheme of my trade (considering the risk reversal and interval hedges), it really just amounts to a short OTM call calendar in VXX. Gains on VXX moving lower, peak losses slightly out of the money, and then can earn on the unlikely but certainly possible VXX spike. The only 'alpha' I could earn using my trade as opposed to a set and forget OTM call calendar is edge in the underlying where I take off hedges at a profit. i.e. predicting when VXX will move lower.
 

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Meant to post from yesterday: Well we got some volatility the last two days but my hedge triggers weren't really going to set off until 14.80 VXX. Unrealized was evaporating so I bit the bullet and took profits. Realized +67. I'm working on some other option stuff that is more time based than direction based, I'll update when I run that live or simulated.


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