Vol Crush.

The secrets to returns.

Good morning.

A few quick thoughts this morning for readers here regarding the recent volatility in the markets. Last night I was texting with a few friends not in the business and the line of “how could you not buy the market came up” — as if it were easy to do, which maybe it is.

A few weeks ago, I wrote this post: The Closet Indexers where I explained a bit of that mentality. It’s a smart business move in reality esp. if you’re a financial advisor which are the equivalent to real estate agents: meaning, you can do the job yourself if you keep it simple and it’s not some, say, $40 million property like this one near me in PR which prob is not a DIY.

But, at a certain level, the returns and risk change and it’s not the same. Some of you that might read this and are trading options with momentum might think that it is because in your mind all you do is “add more contracts” and that’s it. You don’t see volatility in the portfolio, risk or what matters, the rest of the actual capital markets.

And to be clear, you don’t need to if you’re just doing this casually.

But for those who are not this vol crush the last few weeks was one for the history books. Hundreds of millions were made across this vol move and I want to write about it quickly for two reasons:

1.) To give those of you reading this stuck in the minute-by-minute trading mentality a new perspective

2.) To show you what the market plumbing/market structure is all connected and a failure to realize that is dangerous at best ignorance at worst.

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You had a +96% move on the VXX ETF in 4 trading days higher.

You then had a -51% move in about 14 days.

Give this some thought before you read as if this is a TikTok reel.

That’s a lot of f*cking money on both sides - more than you realize.

And not just on that…you have other ETFs that do similar (if not the same) things:

UVXY 0.00%↑ SVXY 0.00%↑ $VXST VIX options and the VIX

The September 30 day options had a move that was even more asymmetrical.

They peaked at $42.12 on August 5th. They are now $5.30 here today.

That’s nearly 800%.

The puts did not do that though. I traded spreads and I did buy puts but the puts were a dud and there’s a reason for that.

A reason that, if you understand using this VXX move as an example, will help you to understand markets better.

And with that I want to make a few comments regarding understanding markets:

I talk a ton of shit about trading these days not because I am punching down but because it’s become so ridiculous to what is being taught and really what is not being taught. Most of you are led to believe that buying calls and puts is the way to make money (and it is TO AN EXTENT, but that’s not all there is). It’s an easy trick - you make a chart, you buy a call or a put you make a little money, the guru gets the praise, and this becomes an infinite feedback loop. What you miss on this is there are situations in the markets were buying calls/puts directionally make zero sense - In fact, in our firm there is maybe 10% options trading and when it’s done it with LEAPS or DITM options. There are situations, like this week, where volatility in the market is suppressed - the moves are priced in and the options will not flow - but, for many, that doesn’t matter - because the lens to which you see this is so narrow that you miss out, just like this VXX trade. There are times where using directional options are just NOT WORTH IT but since we’re in this era where trading = options (at least to the normies) that’s all you guys see and hear about and if that’s all you see and hear about that becomes narrative you use.

Did you see CNBC talking about this? Did Bloomberg cover this? Did your guru who draws lines on charts and does the “I told you so” cover this?

If your goal is to make serious money doing this (and that’s not everyone’s goal) then my advice to you is break away from the narrative and dig. That’s a lot to chew on above so process that and let’s move on.

This VXX/Vol trade was big money and you, instead of relying on me to explain it to you, should go back and work out why and how. You should also work out why the puts barely moved and why the calls outperformed then from their work out the move in equities higher with this vol crush.

You didn’t need to day trade it or watch it tick by tick IF you understood the what and the why of it.

This was a good post from Jesse Stine (Google him) - a good trader who I’ve exchanged emails with over the last 14 years but what he says resonates.

If that resonates with you then you probably get what was said in this post if not…

Then keep working.

Most won’t. It’s a lot of “work” and we’re in a society where we’d rather do ice-baths, attend business coaching conferences to make plans about plans to work, create indicators and do anything but actual work to understand things.

But for those who do this opens up your understanding of markets and expands your trading playbook. And if you are that person, who really says “I want to make a lot of money” then you’ll follow this to understand it.

Conclusion

Markets are connected and understanding that can only help your trading or investing and it certainly helps with structuring a portfolio. Unlike my conversation last night about buying the market this trade on VXX (and others during this) has been better than “just buying the market” - but I get why people don’t dig outside of that: fear, no understanding and work.

Fear is driven by lack of understanding of a subject.

No understanding of something comes from the lack of work to do so.

So, in both instances they’re just excuses to not amplify returns anyway you spin it.

I hope this helps a bit and at a very minimum gets you seeing that there are large moves correlating all of the time to which a lot of money is made.

Dan

Notes:

• I don’t hedge with VXX/VIX ever - in fact we don’t hedge

• I only use VIX and VXX to express views, the rest are pointless (if you run the numbers you’ll see why, most won’t)

• The rare times I sell premium are really with VXX

• This doesn’t apply to the day-traders reading this blog

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