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Volatility Opens New Year Near Record Low

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In a repeat of the previous year, markets surged right out of the gate to start 2018. 
 
Concerns had been mounting that a new year with lower tax rates might initiate some selling in January due to traders sitting on healthy profits from 2017. That hasn’t materialized yet. One has to wonder if there is even a way to quantify the risk of selling into lower tax rates. 
 
Why give up a good thing? 2017 offered very few entries to the market. There is no guarantee that selling now would even allow a trader to get back into their positions before the market runs another 3-5%. And now that lower tax rates are here to stay, what’s the rush in selling? Whether a trader sells now or waits for higher prices later in the year, the tax rates will be the same on the realization of profits.
 
There may certainly be other triggers to volatility though early in 2018, so they should not be  ignored. In fact the list can be quite lengthy. Here are some of the things on my radar as we begin 2018:
 
1. Rising interest rates, how many hikes do we get this year?
2. Does inflation begin to rise above FED targets?
3. Will we get a new funding bill to avoid a government shutdown later this month?
4. Will there be any further high-level developments in the Russia investigation?
5. Always the risk of external geopolitical events (North Korea, Iran, etc)
6. And of course do we start to see any signs that economic growth may be slowing? This should always be a concern late in an expansion.

My Current Trading Approach

With VIX and VIX futures hovering near record lows my VIX allocation continues to be set to daytrade only. This means if I am going to open any volatility positions, I will usually do so before 10am ET and close all volatility positions by the end of regular trading hours, and preferably by 1-2pm ET. I would miss out on a multi-day trend with this technique, but with volatility so low, the main driver of a short volatility position right now is contango. 
 
Contango in VIX futures is currently very strong at approximately 0.5% per trading day, but with no further movement lower in spot VIX, the small incremental gains could be wiped out quickly with even a modest move in VIX futures. Such a move could set me back a few weeks if I somehow get caught in an unfavorable position overnight. I’d much rather work for a trade during the day and sleep better at night with most of my portfolio in cash. In a future post I’ll outline how I prefer to enter a daytrade on SVXY or XIV (I only trade volatility on the short side in such a strong bull market).
 
If we can get away from record low VIX futures again and give us some breathing room to fade a VIX spike I’ll go back to holding a core short position.
 
25% of my portfolio continues to be allocated to TQQQ, TNA, ERX, and SPXL. I did take some profits in TNA and TQQQ by reducing those positions by 20% today.
 
Thanks for reading and Happy VIX Trading!
 
Disclaimer: Please note that I'm not giving any kind of investment advice and you should always determine what trading instruments and level of risk are appropriate for you. I merely write this blog to help me organize my thoughts and form my own trading plan. This helps me stick to it. Trading volatility instruments involves a large amount of risk and some methods can result in the loss of more than your initial investment. 

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