SteadyVol Service highlights:
SteadyVol is designed to be an easy-to-follow, low-maintenance, monthly trade that targets 50%-60% in annual compounded returns while being fully hedged against any catastrophic loss. The model portfolio is based on $12,000 and will usually be fully invested. Members can easily scale this investment amount, as there are absolutely no liquidity concerns on VIX's near-term monthly options.
When creating this trade, I wanted to derive a trade based upon VIX futures that was not dependent upon contango for its gains. While contango is still helpful by increasing the rate at which gains accrue, all of the profit can be derived through positive Theta. In addition, I wanted to create a trade that was extremely Vega-positive to take advantage of increased IV during a VIX spike but not give up any profit potential during an IV decline/vol crush. Finally, I wanted to create a trade with a very favorable win/loss rate and a max drawdown on account of less than 20%. This has been accomplished using ITM debit and credit spreads on front and back month VIX futures, hedged by a ratio of long calls.
The trading strategy is technically straightforward forward, utilizing a deep ITM debit spread on the VIX, hedged by a lower ratio of credit spreads and long calls to profit from positive Theta and negative Delta while also providing very strong hedging against a VIX spike. However, trade management is of the utmost importance during volatile periods. Importantly, option models are very often not accurate as they follow the spot VIX, while the options we trade follow the future of the options expiration month. Here is an excellent resource to follow the VIX futures curve that the options we trade are derived from:
An analogy may be best used here for further explanation. Chess, while an extremely complicated and sophisticated game, has a very basic rulebook. However, once the game begins, it is the strategy of how to use the rules that make the best chess players. The way they become the best chess players is not by reading the rulebook but by playing more and more chess. This strategy is similar in that the more you follow it, the clearer it will become to you. Trading strategies must be able to evolve in order to be used in all market environments.
We are following basic rules, as in chess, but are proactively making the best trades based on market dynamics. All of these trades are made around the initial rules, but are made using the best judgment at that time. For example, on more volatile days, I may choose to close/open half a position instead of a full one. I held the call from the previous trade to reduce our hedge cost. All of the details are explained at the time the trades are made and usually identified in advance. We are trying to be the best chess players with a small set of defined rules, playing against an exceptional player in Mr. Market. The more experience everyone has with the strategy, the more they will understand it. I resist posting option graphs for this trade because, as has been made very clear, they are not useful unless they are at expiration, which is, in turn, accurate. Those who do not understand why a trade has been made should first ask any questions, but they may also find value in modeling the trade by only looking at the expiration values.
The trade rationale is always very detailed and given in advance. Trade timing is not typically important. However, these details and others are best understood during a trade as they evolve. The end goal is always the same - earn as much as possible in positive Theta/negative Delta in the lowest risk combination of debit and credit spreads, which are also hedged against catastrophic loss in a Black Swan event. The strategy has been traded since June of 2022, and the largest drawdown on account has been less than 10%. The trade averaged 5% per month over that time. The VIX has been extremely volatile during that period:
When trading the VIX, it is important to consider exactly what it represents. For those that do not know, the spot VIX indicates what traders believe the maximum move the market will make in the next 12 months will be. This is extremely useful information. Using 2022 as an example, we know we are down about 20% from the peak at the beginning of the year. When the VIX spikes above 30% currently, traders are pricing at a peak to a trough drop of 50%.
This is a very large decrease when considered against the average 38% decline of a bear market. Furthermore, if the VIX persists above 30, it is extremely likely that the market will experience further selling, driving the peak-to-trough estimate even higher. For example, if we drop 30% from the peak and we have a VIX at 35, a peak-to-trough decline of 65% is now being priced in, and this becomes a self-fulfilling prophecy for the VIX to drop precipitously. Unless we are in a 2008-style environment, where a total market wipeout was a possibility, the VIX will always drop once the peak-to-trough estimate becomes too much. Let’s look at the spot VIX for the past 12 months again:
As can be seen, the VIX spends very little time above 30. However, we must still be prepared for the unexpected, as the last 5 years have taught us:
Even here, the VIX spends very little time above 30, but an outsized move could destroy a trade that is unhedged. Therefore, we can count on the VIX spending the majority of its time below 30 but must always have protection in place to keep the max drawdown under the 20% target in the event of an ill-timed moderate to extreme vol spike.
It is STRONGLY recommended that this strategy be traded with Firstrade. Firstrade has zero commissions and uses a true pass-thru of Index option exchange fees. Annual commissions are estimated to only be 3%-4% of total account capital per year. Also, there is no charge for their online trading software, which is quite efficient and more than ample for this trade.
