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Introduction

I'm a veterinarian. So why am I starting a blog about trading? I guess it's because I have an obsession with numbers. Which is weird, I think, at least for a veterinarian. No one probably ever wanted to be a vet growing up and said hey I actually like doing my business's own bookkeeping, filing my taxes, or analyzing market trends. I'm supposed to be doing surgery, and playing with puppies, and healing the sick. How could staring at a spreadsheet possibly be more interesting than that? And don't get me wrong, I love that part of my job. Nothing beats the feeling seeing a beloved pet pull through an illness because of a team effort I helped direct at the clinic.

Yet there's some kind of appeal in seeing a numerical representation of emotion. At least that's how I see trading. One minute the price of something is $25. The next minute it's $25.50. Why? Suddenly someone with a few hundred shares thought it was worth more than what the last guy sold it for and all of a sudden the value is more than it was just seconds before. I've found myself staring at quotes like these ever since I got my first trading account when I was 18, trying to figure out where the next few ticks would go or where a stock would be priced in a couple days. I wasn't very successful though. I could probably write a book just on all the things I've tried and failed at over the years.

A few years ago I hit upon something that seemed to make a little more sense to me. Almost predictable in a way – but I really hate using that term. (Nothing is the market is 100% predictable, and sometimes there's nothing more that the market loves to do than screw over the largest number of people.) But I learned about the VIX. Everyone calls it the “fear index.” It's a measure of how volatile the market is expected to be. Seems boring enough when you look up the definition on wikipedia. It's even more dry if you go to CBOE's webpage and see the actual equation for VIX http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index/vix-faqs#2

The amazing thing about VIX though is that it tends to trade in a certain range. It has a floor which indicates everything is alright with the markets. It then spikes along the way in response to market downturns, political news, economic events, and anything which adds uncertainty and twitchiness to the markets. But once the event passes, VIX usually trends back down to that floor value. It's what's called mean-reverting. I like that. It makes me feel like I have an edge on the market. I don't have to exactly know how far the market is going to move, I just have to make a bet that eventually the market's twitchiness will be more or less than it currently is.

One way to do this is by betting on the down side. VIX spikes occur frequently (smaller spikes can happen a few times a month, larger spikes can happen a few times a year). And if I can place a bet that VIX will drop after I figure it's risen “enough,” and then watch it drop after making the trade, I could make some money fairly consistently. The opposite is also true, and has served some people very well this year. If VIX gets too low, I could expect that it would pop at some point and make money on that trade too once it does.

Now thanks to all the different volatility ETFs that are out there (VXX, UVXY, SVXY, XIV, TVIX, and so on) these types of trades are really easy to make. These ETFs also have their own behavior which can add an advantage or disadvantage to trading them, and these behaviors can be exploited as well, as I'll point out in future blog posts.

I expect to post articles and thoughts on VIX and VIX trading regularly but I want to make it clear – I am not an investment professional of any kind. I'm a completely self-taught amateur that just loves to do this on the side. Nothing I post should be taken as investment advice and you should always do your due diligence and determine what is right for your own risk tolerance. It is possible to lose extremely large amounts of money trading VIX the wrong the way. One day I'll post my experience of how August 2015 unfolded for me. But until then, I'm just using this blog as a sounding board for my thoughts and studies as they develop. Happy VIX trading!

Eric Vymyslicky


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