OptionVue's VXX Trading System

Discussion in 'General Discussion' started by Cilantro, Nov 30, 2016.

  1. Cilantro

    Cilantro Member

    Hi Everyone,

    I've been considering a subscription to OptionVue's VXX trading system (http://www.vxxtradingsystem.com/) and was hoping that some of you might have tried it and formed an opinion. On the surface, Len Yates' underlying concept of exploiting the roll yield inherent in the VXX and XIV sounds solid and recent returns look fantastic: about 100% over the last 9 months (March to end of November, 2016). However, I've also heard rumors that these reported returns are not at all comparable to the actual returns some subscribers experienced. If anyone who's actually traded this system over a longer period of time would be willing to share some insights, I'd appreciate it tremendously.

    Also, if anyone is aware of alternative long/short volatility strategies that have been doing well, I'd be curious to hear about them as well. I know that Jim Riggio is cooking up something new in this space, but until he's ready to share his approach with the CD community, I'm curious to hear if anyone has any pointers or insights.

    Thanks a lot,
    Daniel
     
    Wolfgang and Chuck like this.
  2. DGH

    DGH Administrator

    Hi Daniel. I studied the VXX system and opted out, but not based on hard evidence. I, too, heard some rumblings. Personally, in low vol environments like this, I like to trade campaign diagonals in selected ETFs. I currently hold positions in DIA, IWM, and SPY. I just started the first two after the recent market rallies, but have had an ongoing campaign in SPY since Aug 5. This has returned about 20% for that period. This is a rolling strategy, of course, using weeklys. In times of higher vol, I sell put credit spreads and some directional verticals, similar to Theotrade's in-out spreads. These verticals are nice because they effectively cancel out declining theta and vega. Selection is critical, of course.
     
  3. stevegee58

    stevegee58 Well-Known Member

    Hey Dan, in your campaign diagonals how far out do your long expiration dates go? I've seen diagonals strategies using leaps on DIA, SPY and IWM like yours.
     
  4. DGH

    DGH Administrator

    My longs are 17 Feb. I use 9 to 11 DTE for the rolling shorts. I sell about 25 to 30 delta shorts and roll at 10 delta or 70% of cash flow (approximately). The key is to choose the long leg carefully.
     
  5. Cilantro

    Cilantro Member

    Thanks, Dan! Your diagonals sound surprisingly similar to what I've been doing all year (in addition to the Road Trip and Kevlar, to add some positive deltas to my portfolio via an income-type setup). In a nutshell, here's how I usually do it: I pick deep-in-the-money long calls with delta > 90, several months to one year out. Given that these are so deep in the money, the extrinsic value and resulting theta are pretty manageable. I then sell about 2 shorts for every 3 longs I have, between 1 to 2 weeks from expiration, fairly close to the money, say 40ish delta (depending on available premiums, i.e. in higher IV environments I can afford to move away from the money a bit more and still get paid decently). I do this with ETFs and a few individual stocks. I kind of like the 2:3 ratio of shorts to longs, as it theoretically leaves unlimited upside, should something decide to go through the roof. If I have to roll the shorts up, I may go out further in time to avoid rolling for a debit when I can. Feedback more than welcome!

    Dan, given that you said that the key is to choose the long leg carefully, would you mind sharing what you look for?

    Thanks, Daniel
     
  6. DavidF

    DavidF Well-Known Member

    Hi Cilantro, I´ve been subscribed to OV´s VXX system since about May. Firstly note that long XIV has returned about 100% since March so I don´t think this is the best period to judge the efficacy of the system. Saying that I think OV´s system will handily beat a long XIV position over a longer period of time.

    I could write a lot on the various pros and cons but it comes down to whether you have the nerve to have a large position in XIV. I don´t. However I do use the signals to both day trade XIV and place larger trades hedged with ES futures. Importantly it does identify periods where the differential between the front month VX futures will be offset by volatilty drag (i.e., stay out despite contango). It´s based on a theshold value of the moving average of VX2-VX1. Lot of other ways of doing it, some of which are covered here.-

    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255327

    There´s nothing shady about the reported returns versus what subscribers get, real returns are avaiable, but they have curve fitted (Len Yates says this himself) historical data prior to March 2015 to compare what results would have been if they´d used the model they now use.

    Nothing can predict a black swan so the system can never be perfect but I like it as it keeps me tuned into all the volatilty stuff which is obviously a major part of our trades. But you could, in theory, risk subscribing today and then sitting on cash indefinitely with no entry signal for either VXX or XIV.
     
    Last edited: Dec 1, 2016
  7. Cilantro

    Cilantro Member

    Thanks for your comments, David -- much appreciated! I'll take a look at the paper you shared. I assumed that the substantial draw-downs the system may occasionally generate require nerves of steel... So, if I end up pulling the trigger, I may start small or consider day trading to avoid gapping risk over night. On the other hand, pairing this with Jim's Kevlar still sounds pretty appealing to me, as a down market day is often an excellent Kevlar day, i.e. the Kevlar would at least to some degree mitigate a XIV loss (and vice versa).
    Cheers, Daniel
     
  8. DGH

    DGH Administrator

    Hi Daniel. I don't mind sharing, but my system for SPY and other ETF diagonals is completely different from yours. I use puts in order to avoid dividend-related problems. Here is my current SPY position, which is about 3 days old. i will roll the short soon. http://imgur.com/a/kdljt I have morhped my system from 2 or 3 different sources which I encountered, several years apart. It's low risk, low cost, simple, easy, and with good returns. But, it's not for everyone. Also, it's long vega, of course, so that helps my beta-weighted portfolio. I only do this strategy in one of my IRAs in order to avoid any wash sale rule complications which might occur in a taxable account.
     
  9. Cilantro

    Cilantro Member

    Thanks for sharing, Dan! Yes, now that I can see what you've been doing, I agree that it's pretty different from my setup. My call diagonals are a bit like covered calls, except that I use long calls instead of stock to make them less expensive and usually don't go with a 1-to-1 long/short ratio to leave some room to the upside.
    Thanks again for all your input! Cheers, Daniel
     
  10. DavidF

    DavidF Well-Known Member

    Hi again Cilantro, glad to help. In relation to combining it with Kevlar type structures, what I´ve done when the VX term struture is steep is replace the long call with a 1/5th position in XIV (20k XIV to 100k SPX). It worked very well this spring/summer. The benefit is you crush the returns vs a long call when the market is flat and the term structure is steep. Downside is you get crushed if VIX spikes and there´s relatively little movement in SPX (e.g., Brexit) so you don´t get the neg. delta benefit of the Kevlar. I now keep the trades separate and hedge the XIV with futures (less negative vega) instead of a BF. I also think it´s a decent option to counter positive vega if market is above and out of the tent.

    I believe Jim will add some VX based trades to his set-up soon, so if you´re already doing his trade that might be best combo.
     
    Last edited: Dec 1, 2016
    Chuck likes this.
  11. DGH

    DGH Administrator

    Hi Daniel. Here is today's screenshot of the SPY campaign diagonal I showed you yesterday. http://imgur.com/a/m0sgz Nice long vega response to a small market decline. The front leg (soon to be rolled) is down 8 cents on theta decay and the back leg is up 15 cents. This campaign was launched on Nov 23.
     
  12. stevegee58

    stevegee58 Well-Known Member

    Hi Dan H, what are you looking for in your long leg? Is it a fixed distance from the short or are you looking for a certain delta on the long too?
     
  13. DGH

    DGH Administrator

    Hi Steve. No, I look at the "gestalt" of the risk graph, and adjust the strikes to a configuration similar to this one: here is one on XLY (very liquid) which I launched about 10 minutes ago. http://imgur.com/a/jltFk Of course, I only use this strategy in relatively low volume environments on underlyings which appear overextended and about to roll over.
     
  14. stevegee58

    stevegee58 Well-Known Member

    Did you mean low volume or low volatility?
     
  15. DGH

    DGH Administrator

    Typo....meant low volatility.
     
  16. Cilantro

    Cilantro Member

    Dan and David, thanks for all the updates -- this is great! David, the way you used XIV in the context of the Kevlar definitely sounds compelling. However, given that Jim is likely to unleash his new system soon, I'll probably follow his lead, as you suggested. That said, I'm still inclined to give OV's VXX system a go, independent of the Kevlar (with carefully sized positions). While Jim's and OV's systems share the same instruments (XIV, VXX and cash), the indicators used to trigger entries and exits are probably pretty different. So, maybe there's value in having access to both and decrease allocations a bit when the indicators disagree or get a bit more aggressive when everything's aligned. Fun times ahead :)
     
    DavidF likes this.
  17. DavidF

    DavidF Well-Known Member

    I saw the OV VXX webinar just now here on CD, I don´t think it´s correct to state that XIV makes money on "roll yield", there´s no loss of capital in the roll itself. It´s the loss of value in the front month futures as they converge towards spot VIX.

    Sounds pedantic but I think it´s important to keep in mind that when you buy XIV because the term structure is in steep contango, you´re in essence betting that the speculators in the future market are wrong, and that VX futures will converge to spot VIX, not vice versa. So even when contango is steep I still think it´s important to ask why, e.g., is there a binary event that could prove the futures market correct, and not jump in because of "roll yield".
     
    Last edited: Dec 8, 2016
  18. AKJ

    AKJ Well-Known Member

    This is the definition of roll yield.
     
  19. DavidF

    DavidF Well-Known Member

    No, the roll yield is the difference between spot VIX and various VX futures, it´s a static value. You won´t make any money if VIX gradually rises to the VX contract price even if there´s positive roll yield. What I described is dynamic, VX futures falling in value. That´s where the money is made.
     
  20. AKJ

    AKJ Well-Known Member

    https://en.wikipedia.org/wiki/Roll_yield

    The roll yield is the yield that a futures investor captures when their futures contract converges to the spot price; in a backwardated futures market the price rolls up to the spot price, so the roll yield is positive, whereas when the market is in contango the price rolls down to the spot price, so the roll yield is negative. The spot price can stay constant, but the investor will still earn returns from buying discounted futures contracts, which continuously roll up to the constant spot price.
     

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