Volatility ETFs Trading Strategy


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Video Transcription:

Hello traders, welcome to the Stock Trading Force and the fifth module; Day Trading ETFs. In this lesson, we’re going to learn how to day-trade volatility. When I say day trading volatility which is the strategy, or the strategy number three on the ETF module, I’m talking about a strategy for trading volatility ETFs.

Day trading volatility ETFs can be extremely profitable if doing correctly. A volatility ETF typically moves adversely to major indexes such as the S&P 500. This means that when the index is falling, the ETF will rise and here is where we’re going to be profiting from. This strategy is not like the inverse EFT strategy because it’s based on momentum and breakouts of the SPY or the S&P 500 or whatever ETF tracks the S&P 500.

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We’re going to use the actual indices to explain this strategy to you. So which volatility ETF are we going to trade? We are going to trade the BXX which is the iPATH S&P 500 VXX short-term futures ETF which tracks the volatility index on the CBOE or Chicago Board of Exchange. And the volatility index is the VIX. When we want to go short on the VIX, we are going to use the XIV which is the velocity shares inverse, VIX short term ETF. So in this strategy we can use, where we are going to use both the VXX which tracks the VIX and the XIV which is an inverse ETF on the VIX. And therefore everything we are going to use the S&P 500.

Now let’s go to a chart, and I’m going to show you what I got. I have the S&P 500 right here in the middle. I have the XIV here on my right and the VXX on my left. Now you can see that when the S&P 500 moves up, the VXX moves down. When the VXX moves down, the XIV goes up. So there’s a lot of ways we can trade volatility or the VIX on a daily basis. But I’m going to show you how we’re going to do it with this strategy.

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What I’ve done here is I’ve added volume to both the XIV and the VXX, and I’ve added the RSI, a seven RSI to the S&P 500 and a momentum indicator, a ten momentum indicator that I think I’m going to change to a seventh; now that’s better. All right, so what we’re going to do here is we are going to analyze the S&P 500 on a technical basis and we are going to look for possible breakouts on it. So, I’m going to change the layout here, and we’re going to analyze the S&P 500.

What we want to do here is we want to use simple technical analysis. The simple technical analysis we’re going to use is simple trade-lines for breakouts, baby triangles, and wedges. Because we were momentum, where we want a big move, we want volume a momentum for us to profit from VIX play. So what we have done here is we have located a channel that price is trading in, and we also have the located the previous low that might act as support. You can see the price came all the way down here. We found buyers but we failed to go higher from this high.

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We are also going to point out their previous highs or the previous zone of resistance. So this is what’s in play. Let’s go back to the three-chart layout we had before. This is what we’re going to be playing. Now we are making lower lows and lower highs inside of a range. Well not inside of our range because we don’t know that this is a range just yet because this low has been tested just once. But what we’re going to do here is we are going to wait to see what price does at these lows.

We can see that price has tested and rejected this level of immediate resistance for the third time and then it started trading inside of a channel, an immediate channel. It’s quite possibly going to break to the upside. Now we can see that price respected these channels support once, and we are waiting for it to test it again. So this is the zone that we are looking at right now.

The reason we want to be looking at this point right here is because if price breaks with this low, and we have momentum rising, what we are going to be looking at is at a buy on the VXX. When the S&P drops, we are going to buy the VXX because we want to play the VIX on an S&P 500 flush. If the S&P 500 rises, we are going to buy the XIV which is the inverted VIX ETF. Remember, when the S&P flushes, we are going to trade the VXX and when the S&P 500 rises, we are going to trade the XIV; both in buy positions or long positions.

Now this is the exact zone that we are looking at. If the S&P breaks with this low and starts to flush on a high momentum or on a rising momentum, we are going to buy the VIX at these lows right here. If the S&P 500 however rejects these levels and starts to rise, we are going to monetize on that move by buying the XIV. In this case, you can see that everything was pointing out for a balance of these levels. Why the RSI was in oversold territory, and we were actually waiting for our break on the RSI and a break on the momentum oscillator.

Now remember that a break in the momentum oscillator to the upside doesn’t mean that price is going up. It means that the volume is coming into the market, and it’s making price move up. When price rejects these levels, we are no longer looking at the VXX but we are looking at the XIV. It rejects these levels so we are just waiting for that breakout on the RSI, and we get the breakout on the RSI right here at this candle. And then we have to wait for the breakout on the momentum indicator which comes right here.

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Sorry, we were going to buy the XIV. So, we buy the XIV on the breakout of the channel right here, and we get the signal on the XIV right here. So let me grab just tool; the long position tool. We are going to put our stop-loss around this level so let me just move this a little bit. We are going to wait for S&P to hit this zone of resistance, and we’re going to look at the RSI and the momentum indicator.

When we hit the level of resistance, we picked a momentum and the RSI is in very overboard territory. So we are actually going to get out right here for a 1.33% gain. Now that’s a better than a 1:2 risk to reward ratio. There’re two ways to play this; there is the safe way which is to wait for the breakout of the RSI, the momentum oscillator, and the channel, or we can just look at the rejection here and see that the RSI is coming up from overboard territory and buy the VXX down here.

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If you would have bought the VXX down here, it would mean that our risk was even lower at 13 cents or 0.44%, and we would have made 2.93% on our trade, on our long trade from these levels. In any case we are profiting from momentum in the VIX by buying the XIV…well we are profiting from negative momentum in the VIX by buying the XIV. Again, if you look closely, I’m going to go through a setup on the VXX which is the ETF that tracks the VIX. Remember, we are going to be buying the VXX when the S&P 500 drops. Again, we have our first high, a test and huge rejection so we are waiting for the S&P 500 to test these levels.

So a play on the VXX would have been waiting for prices to hit these levels and see this rejection. Now, we have the first technical entry signal when we have right here a bearish engulfing candle right out of resistance. Then we look at the RSI and the RSI bounced again from the 70 level.

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