Worth for everyone on C2 to read

Trading and Markets
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Today David Juday sent out an email to his subscribers which I think is significant enough for all C2 members to read:

Hi all, my volatility strategies have now spent 1 Year on C2! So Happy Anniversary! :slight_smile: As I reflect on the past year, first of all I’m happy to report that both strategies have performed better than their targets. I set the targets at 50% per year for Smart Volatility Long and 150% per year for Smart Volatility Short. As of today, Long is up 99.7% and Short is up 181.8%! It’s definitely been a favorable year for volatility strategies, so I can’t take all the credit, but here’s what I see when I look back.

First of all, the numbers. Of the 784 current C2 strategies, 192 have been around 1 year or longer. Of that 192, only 17 are TOS. Here are the top 5 (by Annual Return) of those 17 TOS strategies:

  • Volatility Returns – 236% Return, 35.2% Drawdown
  • VolatilityTrader – 210.3% Return, 53% Drawdown
  • Smart Volatility Short – 181.8% Return, 31.1% Drawdown
  • Smart Volatility Long – 99.7% Return, 20.0% Drawdown
  • R Option – 9 2.6% Return, 41.7% Drawdown
    The remaining 12 strategies all have earned less than 30%.

When I look at the top 5, obviously I’m very happy that both of my strategies have done so well. The next thing I notice is that my strategies have the lowest drawdowns on that list. But something else that is striking is the fact that 4 of the 5 strategies on the list are volatility strategies – I think this shows how powerful volatility strategies can be when used well!

I’m proud of the numbers, but what I’m more proud of is the way in which they were achieved. I had been modeling these strategies for years before even joining C2, and had been trading them in my own margin and IRA accounts before I even knew C2 existed. I joined C2 because friends and family had been asking to follow my strategies, and this seemed like a good way to let them do that. Every day and every trade, I realize that this is my money, my friends and family’s money, and all o f your money that I’m dealing with, and I take that responsibility very seriously.

One recent trend that I’m concerned with is the number of strategy owners who create a new (and usually hidden) strategy and make a few very highly leveraged, high risk trades in order to get crazy returns for a few months – and then if they got lucky during those month they go public with these strategies to try to rake in subscribers – and if they were unlucky, then they just shut down the strategies with virtually no risk. Once they go public and get the subscribers, they totally change the types of trades they make. It’s unfortunate because the past returns have nothing to do with their current trading style. I won’t name names, but if you look at the current Leader Board, you will see a number of them in the top 12. I mention this because I don’t want you to get caught up in this. If you like their current investment style and performance, then you should fee l free to join them, but if you’re tempted to join because of outrageous returns in the early months, I would strongly advise against it.

Ok, enough of that – back to the anniversary celebration! :slight_smile: I would like to thank all of you for being wonderful subscribers and for going on this adventure with me! I feel like you are a great group of people who are solid and very well informed. I’m very happy that about 90% of my paid subscribers are still with me today – for all the strategy owners that complain about subscribers not sticking around for very long, I think 90% is a great number! So to celebrate, I’d like to offer each one of you 50% off your next month’s subscriber fee. If you’d like to take advantage of that, simply send me a message saying “Happy Anniversary”, and I’ll adjust your next month’s fee. :slight_smile:

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When you trade successfully on your own account, you don’t hunt for each buck from subscribers and can be really generous. :slight_smile: Happy Anniversary :slight_smile:

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I don’t mean to be “downer” but we all have to be honest and realistic with ourselves here. Yes, the current “inverse volatility” run has been great—all because of the general market’s positive sentiments towards Trump’s supposed “pro business”, tax cuts and less-regulations agenda and expectations since November 8-14 or so of last year after he won the election.

Essentially any “inverse volatility” (i.e. XIV, SVXY) system that bought and held on from mid November (2016) until mid March (2017) - the “Trump Run” or “Bump” (as the President himself like to put it ) - might be patting themselves on the back now as if their system is the greatest thing since slice bread. Yes, the past returns are great (for those subscribers who were on board on any one of these systems since November) but I think it is important and I would caution for any potential subscribers looking at any of these system to evaluate how the trend curve of any of these system’s performance before the Trump Run. Buyer Be Aware!!!

XIV vs VXX pre and post Trump’s win (short - a no brainer after win):

XIV - https://prnt.sc/f9v6wa
VXX - https://prnt.sc/f9v7dz

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Volatility traders are like himalayan climbers. The are better then low elevation climbers. But there is one problem. Most of them die sooner or later in high elevation mountains and low elevation climbers read books about them.

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@marekj Case in point…look at what has happened to Volatility Returns (which is TOS) and VIX TrendFollower (now hiding his last trade from potential subs’ view for 7 days - as has been his MO when his luck doesn’t turn out so well) these last few days. Imagine only if they had “guessed” the right side the night before Wednesday morning’s bloodbath (probably would be telling their subs now how awesome their system was able to “predict” such things).

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I’m one of those vol traders, and you’re right @KT3, to some extent. The simplest benchmark to compare to is going long XIV. Running long XIV for 1 year from May 18 2016 to yesterday (like David’s) would have returned about 150%. So David undershot in one fund and surpassed in the other. But David’s drawdowns (or comparative lack thereof) tell a better story, and it’s a significant part of his strategy. Long XIV for that period suffered a 36% drawdown at one point (late June 2016), a bruiser unless you’re a true believer (or went away for the summer). David beat that handily in both strategies, giving much prettier equity curves. Kudos @_J. I hope my first year on C2 goes so well.

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I laughed when I saw Volatility Returns’ developer rescaling his TOS system right before the massive 36% hit he just incurred. Upped the price on his subscriptions from $30 to $99/mo once he lured enough people in then rescaled his ~400k position down to 130k before losing nearly 50k of that in the last 2 days instead of nearly 150k on the pre-scaled amount. Kudos to him for subtly deleveraging his own bet on his own strategy (why do so if so confident in its success going forward?), while keeping it TOS and leaving his subs none the wiser.

Also interesting risk management when he went in 2x leveraged on the entire account into the 1st round of the French election. Instead of making 30%, he could have lost 30-40% had the election resulted in an upset, but ultimately it ended up catching up to him in the end. Good that he had the sense to rescale his amazing strategy, mainly the result of a simple buy and hold XIV strategy post-Trump election (with stellar returns due to the 2x leverage), before going into the inevitable vol spike that just occurred. Too bad for his subs though who missed out on all those previous gains and just took one straight to the face.

Also, the top strategies are all volatility strategies or option selling strategies because they win 90% of the time, but the 10% losses are usually 10x the size of the winners when they occur. Option selling strategies on volatility are even worse in terms of skewed R/R, but they do provide very pretty equity curves and low drawdown figures for the subs. We’ve just been unwitting benefactors of the central banks’ put on the market that prevents such volatility spikes from wiping out the shorts. Only time will tell if this continues to be the case.

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I think it’s great that volatility trading is doing well lately and I appreciate the traders who offer their services in that area. But I’ll echo the sentiment of some others above–selling volatility is not a panacea in all markets. It’s very left-skew, like selling insurance, and works most the time to make small amounts consistently. But when it doesn’t work, when the rare events happen and the insurance claims come in, then you’re facing big losses. There will be times the market is very cruel to selling volatility, and the top systems here will no longer be volatility systems.

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Comparison of trading volatility with insurance companies business model is valid. Comparisons C2 volatility traders with insurance companies are 100% incorrect. Many european insurance companies exist more then 100 years and survived 1st and 2nd war claims. C2 volatility traders track record is based at best on last 2 years, when nothing could go wrong. First signs on volatility increases, already make many of these traders strategies questionable.

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I’m only making the comparison as an example of the left-skew type trade being done. Obviously insurance companies have freedom to define and price their risks so they are profitable. Unfortunately markets aren’t like that–you can’t get the market to sign a contract detailing various risk circumstances where you don’t have to pay up.

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David, my comments were not to your post, just to overall perceptive and understanding of C2 volatility strategies. I have simple classification of volatility traders. Non-TOS volatility traders are opportunistic, riding latest trend. TOS volatility traders are entrepreneurs with my deep respect, but it is still way to early to judge their business model based on their track record and market trend.

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JITF, from all the comments made on this thread I still like yours the best.

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The backtest results that volatility returns system shows have some of their biggest gains in years where there was a big fall in the market like 2008, 20011. In the backtest the system must have timed these VIX spikes too well. This signals overfitting as long volatility trades are much harder to time than short volatility trades. If you’re off by just two or three days you can get crushed. His huge recent losing trade (long UVXY) would have been a big winner if it was done just 2 or 3 days before. It’s unlikely that the system can come close to it’s backtest success on long volatility trades. It’s normal for over fitted systems / over optimized systems to crash in live trading.

At the same time the performance on XIV trades has been very strong, though in this environment any system that bought and held XIV and also used leverage would have done super well.

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Yes, that is the key. A few days difference makes or breaks these vol systems, and each of them have signals that are a few days apart but generally in the same direction. It almost appears as if that difference in timing is simply luck and that backtest results are completely meaningless when a mistimed signal (by even a single day) can result in massive divergences from apparent results.

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@MaxTor and @Elemental I agree very much with both of you. Most volatility systems are based on a timing model which evolves from backtesting. Curve fitting by accident is a real danger in developing a volatility system. This is due to the fact that a few well-timed trades can make up a significant amount of a system´s performance because of the potential huge moves of vol-ETPs.

This is why I used another approach in developing by not trying to time the volatility market with my system. The performance is achieved by smart risk- and moneymanagement and the long time advantages of being either short volatility or being completely out of the market when general market conditions are unfavorable.

I have written more detailed information about my system in this thread: New and conservative Vola Strategy 100%TOS

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There is plenty of float in the insurance business from collected premiums to offset “huge claims.” I’m not in the insurance business so I’ll defer to investors like Warren Buffett on that, but I will say one thing - he certainly isn’t complaining about the performance of his insurance businesses. Similarly, VIX premium sellers aren’t complaining either.

I just did some rough math, so bear with me, but for the VIX weeklies expiring today 05/23/17, there are 141,451 call options that have traded. All things being equal, 1487 call options will expire in-the-money. Roughly one percent of call options will expire ITM for this expiration, and 99 percent of them expire worthless. This phenomenon occurs over and over with the VIX. In the past there have been clear warning signs when it is no longer as safe to be short (ex. inverted futures curve).

Many people say “it just takes one black swan event to wipe them out.” Such is the case for any of the S&P Mini futures systems on C2 and any account that is long U.S. markets. Those investors would be better suited in a high yield CD (good luck finding one without millions of $) so they can sleep at night.

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While the market structure of the VIX can tell one that there may be known issues on the horizon (whether actual or imagined), it does not forecast or give any indication of unknown unknowns.

The problem with premia is that you could see a limit down in the market for some amount of time, certainly not going to kill cash index investors or even reg-T fully margined ETF investors (2X leverage), but you could find where there is no ask of any size on the volatility product call options and index put options. So it is possible on just the derivatives to get smoked meanwhile Joe Main St. may not even have had a chance to do anything.

I reference things like the S&P flash crash, the Swissie crash, Fukushima, Russian Ruble (which by the way took out a very well funded and smart group of people with nearly limitless computing power and intellectual resources at the time), etc etc etc.

You stick around long enough it will happen, so one can either gamble with the leverage in terms of it won’t happen while you have market exposure, or one can set up a risk configuration such that if one is locked out of the market they only lose at most X (X being whatever you or your investors if you are running a fund/model can tolerate). I prefer the latter (as the cost of absolute returns over Y period of time), but there are certainly a lot of people who prefer the former.

Lots of shameless gambling going on right now in the volatility side of things.

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No big deal for C2 developers since they just use imagined money investing to harvest real sub fee income.

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While the market structure of the VIX can tell one that there may be known issues on the horizon (whether actual or imagined), it does not forecast or give any indication of unknown unknowns.

The market structure of the VIX is certainly not intended to be a crystal ball, or one that predicts exogenous events. Rather, it is used to determine potential short-term “volatility of volatility.” In other words, it measures the potential magnitude of such events. The normal behavior of VIX is to be in contango and as soon as the pattern is interrupted it may be a cause of concern for shorts.

The problem with premia is that you could see a limit down in the market for some amount of time, certainly not going to kill cash index investors or even reg-T fully margined ETF investors (2X leverage), but you could find where there is no ask of any size on the volatility product call options and index put options. So it is possible on just the derivatives to get smoked meanwhile Joe Main St. may not even have had a chance to do anything.

In the event that the market for the options becomes un-tradable, then what would the premium seller owe to the buyer? It seems to me that the buyer (premium holder) would be the loser in that situation.

You stick around long enough it will happen, so one can either gamble with the leverage in terms of it won’t happen while you have market exposure, or one can set up a risk configuration such that if one is locked out of the market they only lose at most X (X being whatever you or your investors if you are running a fund/model can tolerate). I prefer the latter (as the cost of absolute returns over Y period of time), but there are certainly a lot of people who prefer the former.

When you define X risk, are you talking about total amount invested or is there a stop loss? Most investors can’t tolerate their amount invested being reduced to null, so they set stop losses. In the event of a locked market, stop losses would no longer be valid, leaving them with their total amount invested at risk of loss. Further, if the market is locked, how do we assume that the derivatives market would remain tradeable and put premium sellers at massive risk of loss?

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I think what you are not appreciating is the position you will be put in by your broker should you have undefined risk on and things go illiquid. They can reduce your margin to 0, they can call you up and require you to secure your positions with cash right now, regardless of what normal product margins were previously in place. The exchange itself can also force this scenario.

So then you get a margin call and there is no real market, so guess what, someone gets to take you for a ride at whatever price they want. Could it be 300 times what you sold the option for? Yes, yes it could. Your argument is a exploding illiquid market to the upside with no good asks in sight is not a problem, but it will be when you are naked and leveraged and get hit with a margin call. Even if they can’t liquidate that position into the market at that moment, they will liquidate anything else you have on to try to cover it, and the first ask that shows up will get hit at whatever price is printing.

The way you solve this problem is you buy re-insurance and define your risk, in other words you trade spreads, or you trade naked options cash secured. Stop losses are not a solution to this problem…

Now I ask “popular” trade leaders on here, who are trading 5x cash margins selling naked options, what happens to you in this scenario? You go away and you are probably never coming back from it, along with all your investors. The likelihood of such an event is somewhat debatable, but I don’t believe it is debatable that it is more likely than what many participants believe and I’ve seen it in varying degrees of severity in various products over the last 20 years to have a serious respect for tail events.

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