The Worst Year in Ben's Trading Career (Patreon)

Happy new year. 

2023 was the worst year of my trading journey so far.  I lost ~20% of my account. At the same time,  global indexes went up lot.

This implosion was due to sizing trades too large, and the gambler's fallacy.

I sized the earnings trade too large from the jump, but also got roped into thinking 

The earnings trade is having the worst few quarters I've ever seen, that must mean the next one will be really REALLY good.  

This is absolutely idiotic and false. I don't understand any of the math or anything behind the Kelly Criterion, but I know one of the takeaways is that as you lose money you need to size smaller. 

I also realized after this that if you lose 20% of your account from one strategy, it's because you're a fucking moron gambler, not because you're systematically taking trades with negative EV.

My goal going into 2024 is to trade smaller in each individual strategy. I actually think the combination of strategies I have in aggregate should make money most years, which means it's inexcusable to lose 20% of the account due to being an idiot. 

Fortunately I think the "being a dumb fuck and sizing your trades too big" problem is easier to solve than the "take trades with no edge" problem. I'm fairly confident that the trades I have are +EV over the long term, so now it's a matter of sizing them to prevent another catastrophe.  

Improving the VIX ETN Trade

My best performing strategy this year was the VIX ETN trade. It also required minimal work.

This obviously was largely due to luck, but I think this is a promising strategy and I want to continue to make it better. 

If you want some more background, I made a post a while ago titled "The Deadliest 'Free Money' Trade" that looks at using the level of the VIX and the steepness of the term structure (a measure that helps you guess whether the basis is big or small) to determine when to buy and sell SVXY.

                   This is a costless backtest using contango and the level of the VIX as a signal

Going into 2024, I want to make some improvements to this strategy and make it more-or-less bulletproof. 

I think the idea is sound, the backtest looks good, and my live results have been good, but there are a lot of details that can be improved upon. 

This is also a trade I think anyone could do in a Robinhood account. Though you might not be able to do the perfectly optimal method, you probably get 90% of the outcome.

Please like the post, as a lot of people worked very hard figuring these things out so I could steal them and make this.

What is the VIX

The VIX is an index that tracks the implied volatility of options on the SPX or something. 

That's all the detail I'll go into because the calculation and details are irrelevant for what I'm doing.

More importantly, the chart look like this. 

You can see it goes up in a big way sometimes, but always seems to mean revert back to some lower level. 

You might also notice there appears to be "regimes". After COVID it didn't really mean revert back to pre COVID levels for a minute. I don't know what this means and don't care. 

Just by eyeballing the chart, you'd be right to think trading this should be easy. You could just buy it when it's low, and short it when it's high. On average, that would print. 

Unfortunately, it's not that simple.  

VIX Futs

You can't buy and sell the VIX directly, you can only trade it with futures. 

VIX futures are literally a way to gamble on what direction the VIX is gonna go. Like I'm pretty sure there is 0 purpose for these other than to gamble. 

Buying VIX futs is just betting VIX is gonna go up. Shorting VIX futs is betting VIX is gonna go down.

Unfortunately, everyone else in the world has also seen the chart above, which means when the VIX is low, you have to pay a premium to go long, and when the VIX is high, you have to pay a premium to go short.  

This premium - the spread between spot VIX and the futures price - is called the basis. 

More detail in "The Deadliest 'Free Money' Trade" Post if you're interested.   

Stonks go Up. Short Term VIX Futures go Down. 

The biggest and most prominent effect in all of this is that ETNs that are long VIX futures go down over time. 

Below is the S&P VIX Short-Term Futures Index. Notice how it goes down in a big way. 

This is because volatility is usually low, but it spikes up really fast sometimes. It's kinda similar to how stonks go up, but they go down really fast sometimes. Because of this risk, there's a premium associated with holding them. 

Being short VIX futures in any capacity has historically proven to be a +EV bet. 

Unfortunately VIX futs are also big af. Even if you have a bigger account, you need to put up a lot of margin to trade them, which sucks for retail degens.

However, there is still hope. 

VIX ETNS 

ProFunds Group and other financial guys asked the question:  

Most people really love gambling on the VIX, especially with leverage. But most people are too broke to trade the futs directly. How can we DEMOCRATIZE gambling in the VIX?  

And it was this question that led them to conveniently create VIX ETNs. A class of products that incinerate money in various ways. 

Some do it slowly over time 

                                                                UVXY incinerating money

Some do it overnight 

                                                                  XIV incinerating money 

The two images above are two key examples of:  

A - The effect we're trying to capture 

B - The thing we're trying to avoid

UVXY is an ETN that seeks to deliver holders 1.5x the daily returns of the Short-Term Futures index.  Just eyeballing the chart, you can see it has absolutely incinerated money since its inception. We want to short this thing, or long it's inverse counterparts. 

XIV was an inverse VIX futs ETN that imploded causing some guy on WSB to lose 4 million dollars. We want to not be long this thing when that happens, or at least be diversified enough that we'll survive. 

Today I'd like to take steps towards answering the following question:   

What is the best VIX ETN, or combination of ETNs to buy/sell at any given time?

There are a lot of different VIX products you can trade. Let's look at the candidates: 

• UVXY: 1.5x exposure to Short-Term VIX Futures Index 
• SVXY: -.5x exposure to Short-Term VIX Futures Index 
• SVIX: 1x exposure to Short VIX Futures Index  
• UVIX: 2x exposure to Long VIX Futures Index
• VIXY: 1x exposure to Short-Term VIX Futures Index
• VXX: 1x exposure to Short-Term VIX Futures Index

There are multiple factors we can look into to determine which ETNs we should be buying and selling at any given time. 

Diversification

As far as "existential" risks to the strategy, some kind of implosion with the ETN in XIV fashion is the biggest thing to avoid. 

In fact, when you see how persistent the decay in these ETNs is, you realize just preventing some XIV-esque catastrophic implosion gets you 80-90% of the outcome as someone optimizing every little detail.  

For example if it was guaranteed SVXY was not going to have some crazy implosion, while the expected returns of shorting UVXY may be bigger than holding SVXY, on paper, you'd probably want to just buy and hold SVXY. 

I'm not smart enough to read through the prospectus and try to understand what the implosion risk factors for each ETN might be. Not saying someone couldn't, but I definitely can't. 

Instead, diversifying between a few different ETNs might be a good solution for smooth brain retail people who don't have the time to do this bs. 

Leverage Decay

More highly leveraged ETNs incinerate money faster. 

This is why UVXY tends to lose more money over time than VXX (unfortunately it also has a higher borrow rate, which will talk about in the next section). 

Highly leveraged shit needs to trade more to maintain it's target exposure; especially when the reference moves a lot. This trading costs money, causing the ETN to burn more money.   

ChatGPT will write you a simple excel calculator to get the decay of an ETN at different levels of leverage.   

Costs 

On paper, shorting the most leveraged ETNs would be the best bet because of the volatility drag effects; however, we also have to consider the costs to trade each.

Below is the borrow on UVXY vs VXX

You can see the borrow on UVXY is more expensive in a big way. 

Net of the implied decay for each, my model still says UVXY is a better short.

Right now I already have a VXX short position, so I don't want to pay to close it and open a new one in UVXY. The next time I rebalance, assuming my net decay in UVXY is still larger, I'll short that one instead.  

Individual Constraints

If you're using a brokerage like Robinhood, the inverse Short-Term VIX ETNs like SVXY and SVIX are gonna be your only option. 

While that may not be entirely optimal at any given time, once again, you get 80-90% of the benefit from just shorting the Short-Term VIX futures by any means.

I usually hold SVXY and VXX or UVXY depending on which has better looking implied decay. If there's no big difference, I'll just hold all 3.  

With the VIX ETNs, I think any protocol that prevents you from blowing up (IE diversification & sizing small) is probably more important than all this other bs. The other stuff is more just a fun intellectual jerk off.  

Portfolio Update

Portfolio is looking like a boomer's IRA at the moment, but gonna get more risk on tomorrow.