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PureVolatility Portfolio

Trading Instruments

VXX & UVXY for Collar, UVXY for standalone long puts

Position Types

Collar, Long Puts

Strategy Description

We will be looking to hold constant exposure to short volatility while the curve is in Contango in an effort to harvest volatility premium.  We will also look to go long volatility when the curve is in significant Backwardation and indicators reveal the trend will continue in the short term.  Because the curve is in Contango approximately 80% of the time, we will hold short exposure to volatility the majority of the time.  The main strategy to gain this exposure will be through an option only Collar spread.  For those not familiar with the Collar strategy please read this article (in our trade the shares are replaced by a deep in the money option).  We use an inverted Collar on VXX.

The PureVolatility model portfolio will be based on total capital amount of $10,000 with between a 5% and 10% allocation on risk.  This is very important as those who are trading in a Reg-T account would on average need $10,000 in initial margin to hold the position even though the risk may only be $500.  Portfolio Margin accounts would only require the $500 max loss amount.  Reg-T is somewhat antiquated when it comes to margin for a Collar spread.  However, this really should not be an issue because if one does not have $10,000 to put aside for this strategy it is probably not appropriate.  Furthermore, the increased margin amount will keep members from over allocating to this very aggressive strategy.  We will target a risk reward of better than 1:1 for a two week holding period. 

Here is an example of the Collar strategy on VXX with the underlying at 38.28:

Long 1 VXX 100 put @ 61.30(expiring approximately 45 days out)

Long 1 VXX 40 Call (expiring three weeks out)

Short 1 VXX 35 Put (expiring two weeks out)


The objective of the trade is to have VXX decline as a result of Contango in the VIX futures curve.  (To learn more about Contango please review this article by Vance Harwood).  Of course the VIX futures complex is an extremely volatile space, therefore we will not always see a smooth drift lower.  This is the reason we hedge the trade with the long call and short put.  The long call protects us to the upside by limiting losses and ultimately even makes the entire trade profitable with a large volatility spike.  To see how this played out in real time please review Kim’s article The Incredible Winning Trade In SVXY.  The short put provides us premium in the event VXX does not move down to our short strike. 

Selection of strikes and dates are very important and will change based upon VXX IV and the level of Contango in the futures curve.  This is not rules based but rather discretionary.  The objective is to close the short put a few days before expiration which will have the long call about ten days away from expiration.  At this time both the long call and short put will be rolled out.  This process is continued until the long call matches the expiration of the long put at which time the trade will be closed.  We always want the long call to be at least a week out to avoid as much negative Theta as possible.  Also, we want to have protection in the event of a total catastrophe where the market is closed for up to a week.  In this event, we will still be holding the long call when the market reopens and the trade would undoubtedly end with a very large gain.  The trade is flexible and allows for adjustments in the event that VXX moves against our position.  These again are not rules based but rather discretionary.  In large volatility spikes the trade will typically be closed and replaced by a straight long put on UVXY as more of a volatility mean reversion play.  Here is a risk graph of the Collar position at initiation:



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TreasuryOptions Portfolio








TLT model portfolio is a strategy geared towards active traders.  This is a very active method of trading TLT using Iron Flies as well as credit and debit spreads.  This is a full portfolio combination trade rather than a single trade as part of a more broad portfolio. Therefore, it is managed much more conservatively than the standard single TLT Iron Fly.  As such we are targeting lower gains and losses and lower volatility.  The objective is to never have the combination trade/portfolio down more than 10% during any trade iteration.  We do this by actively managing the positions and carrying Black Swan protection.  We will also scale in to the back month while we scale out of the front month, so at times we will be carrying two expirations.  We will target 10%+ monthly gains on the entire account value.  This is a very active trade that is positioned based upon trade thesis and Greeks, but price action will also play a major role for adjustments.  We don’t want to chase the tape, but we also cannot fight it.  Therefore, the TLT portfolio is best suited for those interested in active trading and those looking to grind out singles rather than going for homeruns. 

This is not rules based but rather discretionary strategy.




Introducing The Elephant:


The above is our new trade design - The Elephant.  I have been waiting to deploy this version of the trade until the Fed signaled it would pause.  Now that we have reached that point we can begin to use the new design.  The overall key here is when TLT moves rapidly in times of low inflation and no Fed hikes (read now), it is extremely likely that rapid move will be to the upside.  The Elephant protects us from this while we sleep.  When TLT moves lower in environments like today, it tends to grind lower.  This gives us ample opportunity to adjust during the trading day to feed negative Delta when necessary.  We will leave dry powder for that reason.  THIS IS A WEEKLY TRADE.  This trade will be scaled into daily.  Approximately 20% capital will be opened on Thursday, 20% on Friday, 20% on Monday and 20% on Tuesday - all net premium selling.  20% is held for any emergency adjustments on Wednesday or Thursday, which is when the majority of the trade will be closed.


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