Perhaps no group of traders is more frustrated right now than those attempting to bottom fish the volatility markets. The interminable wait for a rise in volatility is bringing angst to those who only know how to thrive in hyperactive markets. Not to mention the well-meaning traders who have been trying their hand at profiting on the long side in VXX and UVXY.

Poor souls.

The pair of volatility ETNs should carry the tagline “the widowmaker” just to make sure the denizens of the Street buying them are acutely aware of what awaits. To ensure today’s missive isn’t too cryptic let me bring you up to speed on these volatility products.

First, the go-to Index for all things volatility is the CBOE Volatility Index. Because of its ticker symbol, we affectionately refer to it as “the VIX.”

Second, the VIX is an untradable statistic that can’t be bought or sold. It tends to oscillate up and down over time with low readings eventually giving way to high readings and vice versa.

Third, even though you can’t trade the VIX Index directly, there are futures contracts listed on it that allow sophisticated traders to speculate on its movement.

Fourth, there are exchange-traded notes (ETNs) that are designed to track VIX futures.

Fifth, VXX is the most popular volatility ETN and aims to model a hypothetical 30-day VIX futures contract.

Sixth, UVXY is VXX on steroids. It’s a leveraged ETN designed to move 2x the daily movement of VXX.

Seventh, the structure of both products is complex. In my not-so-humble opinion, you should steer clear of these vehicles until you understand all the vagaries of implied volatility, including the relationship between the VIX Index and VIX futures, how to analyze the term structure of VIX futures, and concepts like contango and backwardation and their impact on the behavior of VXX and UVXY.

Until you understand these concepts, good luck trading the widowmakers. You’re going to need it. It’s hard enough making money trading products you know. Let alone dabbling with overly complicated derivatives that a rocket scientist may have trouble understanding.

Now, to the meat and potatoes of what I really wanted to talk about today. Some people like to buy VXX because it goes up in the short run when the VIX spikes. And since the VIX spikes when the stock market drops, these funds are often viewed as portfolio hedges. They act as diversifiers that make money when all your beloved stocks are being taken behind the woodshed.

In an ideal world, you would buy VXX right before a market crash, then ride it to the moon and exit gracefully to play with your profits in the low gravity. In the real world, things are messier. Nailing a bottom in VXX is insanely difficult. If you’re buying it for portfolio protection you’re probably going to be early. And the fund doesn’t sit still until a VIX spike materializes, no. Like a slow leaking tire, it loses a bit of value day after day after day. This makes it a pain to hold long enough until the much-anticipated market selloff materializes.

So what do I suggest for traders seeking something that rises in value when the market falls? Frankly, I can think of a million things I’d prefer over a long VXX position. Like bear calls spreads or put calendars. At least those don’t get their heads chopped off when the market meanders.

If you’re intent on playing VXX and the like to the long side, then you best make sure you’re position sizing correctly. And learn how to hedge it if it goes against you. And, maybe, figure out a timing system that gets you in only when VXX starts trending higher.

If you made it this far then a hearty boo-yah to you. Lady Luck just told me she’s going to hook you up one of these days.

---

Financial freedom is a journey

The Tales of a Technician series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

# Sign up now for a 15-DAY FREE TRIAL #

---

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisers, to determine whether such trading or investment is appropriate for that user.