Selling volatility works until it doesn't


#1

You could have made almost 10 times your money over the last two years by simply betting that volatility would continue to fall. Then you would’ve lost 91% of your money in a little over a week. This market is not for the faint of heart or foolish.


#2

There is no need to gamble (i.e. buy and hold). Using a price wave analysis you would have made a fortune going up and then almost doubling your money again on the way down!


#3

If you bought UVXY (long vol times 2) you would’ve made about four times your money in the past few weeks! I did well but not that well. Buying and holding these instruments is worse than gambling because you are guaranteed to lose (even a little old lady occasionally hits it big playing the slots). Then they break during market turmoil. SVXY, which should gain when markets rise, was unchanged as stocks rallied back strongly yesterday.

Yes, Hurst’s approach works well on even structurally flawed instruments. In fact, these assets often show extreme cyclically. I would argue Bitcoin falls into this category as well. It was structurally flawed because you could only play the long side for the first several years of its existence. It started to crater when you had the ability to short it with futures (and the longer price wave turned down).


#4

There are some (me) who argue that the major indices suffer from the same problem. It is far easier to go long and stay long, contributing to their ‘pseudo-trendiness’.


#5

I guess we’ll see about that between now and 2020😊.


#6

I’m not sure what you guys mean by the price action being “structurally flawed.” There may be some models of the price movement that are inaccurate, but “the price action is always right.”

Hurst teaches that a very large percentage of price movement is non-periodic/non-cyclical. I believe this is what results in the “pseudo-trendiness” of the indices. It is relatively easy to measure but impossible to forecast very far into the future with consistent accuracy.

I think bitcoin might be presenting a unique situation. Since it apparently has no intrinsic fundamental value, it might be argued that vast majority of its price movement is the result of the “x-factor.” This may explain why it decomposes so consistently, at least from my perspective. Just speculating of course!


#7

Those instruments are (were) structurally flawed. Price is always right.