How To Trade VIXEN

A few weeks ago I introduced a new IV related trading system which I call VIXEN. While beta testing the signals over the past few weeks I accidentally left the subscription product on my signup page and a few eager beavers managed to sneak in. So I thought I may as well follow up with a post that focuses on the actual process of how to trade VIXEN as a subscriber and in particular as a retail trader.

The Short Game

If you’re a regular reader here then you probably know that I do not recommend to hold volatility ETPs for more than a few days. The simple reason for that is that courtesy of the magic of systemic contango all of them, with the exception of inverted products like the SVXY, have lost money every year since their inception on a long term basis. Which is why we regularly see inverse splits in order to prevent them from approaching zero and to make it easier for retail clients to trade them.

As a matter of fact Proshares has scheduled both its UVXY and SVXY exchange traded funds to be split again on September 18th. If you own UVXY shares you will see the number of shares you’re holding decrease by a factor of 5 and the price will roughly quintuple.  If you own SVXY shares you will see the number of shares you’re holding decrease by a factor of 4 and the price will roughly quadruple.

Anyway taking advantage of chronic contango many traders aim at shorting VXX, UVXY, TVIX, etc., which is why it is sometimes hard to find shares to borrow. Although VIXEN only holds positions intra-day for only a few hours anyone trading it will have to compete with other retail traders eager to exploit a small but consistent edge offered by the slow financial drag inflicted by contango in the underlying futures contracts.

Brokers For U.S. Traders

Full disclaimer: I am not currently working with any of the firms suggested in this page, so I do not benefit financially in any way if you decide to work with them.

In order to make life easier (and cheaper) for my subscribers I spent some time researching brokers for U.S. retail traders in particular. At the current time MB Trading and Cobra Trading seem have the best borrow available for short sellers. MB Trading has been acquired and is now a part of Ally Invest. Cobra Trading is an introducing broker for Interactive Brokers, so this means Interactive Brokers usually has pretty good borrow available.

TradeStation and Zacks Trade are popular choices for shorting stocks because of the large number of easy-to-borrow stocks that both of them offer. Moreover, both Zacks Trade and TradeStation offer tiered pricing structures for highly active traders (that would be you if you’re trading VIXEN), where traders can pay per share instead of per trade. This keeps the cost of short selling down to a minimum. Ally Invest offers per trade pricing only, but this isn’t necessarily a bad thing.

Zacks Trade’s per-share pricing starts at $0.01 per share and TradeStation’s per-share pricing also starts at $0.01 per share. This is nice for small share trades, but if you’re trading more than 1,000 shares at a time, on a low priced stock, for example, per-share pricing quickly adds up, so you would want to use a flat base rate of $4.95 ($3.95 w/ promo) at Ally Invest.

A 1,000 share order costs $5.00 at TradeStation and $4.95 at Ally Invest (without including automatic discounts for volume or trading activity). Pricing is a major aspect to take into consideration when choosing a broker for short selling. With per-share pricing, it costs more to short a large number of shares with Zacks Trade than with Ally’s base $3.95 rate. Some brokers also charges fees to cancel/modify orders. Ally does not charge fees for cancelling or modifying orders. Neither does TradeStation or Zacks Trade.

Out of all of the brokers in the US, these are three of the best options for shorting ETPs and individual stocks.

Ally

Commissions: $3.95
Account minimum: $0.00
Bottom Line: Ally Invest acquired MB Trading (a brokerage dedicated to active traders) in 2015. Out of all of the stock brokers in the US, Ally has the best combination of low commissions and easily shortable stocks.

TradeStation

Commissions: $5.00 per trade
Account minimum: $0
Bottom Line: TradeStation offers a fantastic platform for short selling. There are a lot of easy-to-borrow stocks, a helpful trade desk, and very low pricing.

ZacksTrade

Commissions: $0.01/share, $3 min
Account: minimum: $2,500
Bottom Line: Zacks Trade is a professional broker for serious short sellers. Commissions are dramatically cheaper than Interactive Brokers, the customer service is better, and you’ll still get access to a large list of easy-to-borrow stocks.

Hard-to-Borrow Fee

If a particular stock does not have a lot of available shares to short, it will be classified as “hard-to-borrow” (HTB). Due to their popularity among both retail and institutional traders IV ETPs are often classified as HTB and thus your broker will charge you a small fee. Keep in mind that this is entirely broker related and thus the VXX for eacmple may be hard-to-borrow at one broker and easy-to-borrow at another. Meanwhile the UVXY may be easier to borrow at the first broker. Although IV ETPs are universally more difficult to borrow, this characteristic is entirely set by the broker.

Margin Requirements

A hard-to-borrow fee is not the only number you should look at when selecting a broker for short selling. You need to look at the minimum requirements to open a margin account, because a margin account is required for short selling, especially when it comes to IV related ETPs. It is quite possible that elevated margin requirements of your current broker (as e.g. those over at Interactive Brokers) will force you to move to a more reasonable competitor.

Trading Options Via VIXEN

For most retail traders however, in particular those with accounts < $100,000, buying options or vertical spreads instead of ETP shares directly is the best way to go. I recommend the shortest expiration date you can get your hands on, which either is the current front month or weekly options.

Assuming a long put position on the VXX or UVXY: I would recommend a strike 7% or more ITM, and with the shortest duration possible. This will keep your theta decay and gamma losses low while keeping the number of contracts you can buy reasonably high (thus allowing for higher leverage). Trading soon to expire ITM options gives the opportunitity to somewhat treat your option positions like mini-futures contracts.

Note that the rules for spreads are much tighter for > ITM options.. i.e. once a spread goes OTM, they can widen the spreads substantially. As long as an option stays ITM when it moves against you and hits the > stop loss, you should be getting a good fill. If not then you may want to consider having a chat with your broker.

Be aware that TVIX does not offer options thus I supply the signal for the fortunate few who can actually borrow it. In general you’ll have your pick of the litter as the four horsemen I currently provide signals for (VXX, UVXY, TVIX, and SVXY) tend to trigger very close to each other, empirically I’d say about 65% of the time (I will need to run some stats on that). So you can sort of pick and choose which ones you want to trade. And of course on the SVXY you can go simply long as it’s an inverse ETF.

Calculating Your Stop Loss

I have put together a new position sizing and max loss calculator for VIXEN which you can find here. Calculating your initial stop loss is a bit more tricky when trading options obviously as there are so many variables. But basically you want to calculate how much your option position would lose if your stop gets hit – you max loss must never exceed your R size – this is important.

So if you are trading 1% of a $100,000 account you are shooting for a $1000 max loss. Most trading platforms these days (e.g TOS) offer tools that allow you to quickly project that. May be a bit of a pain the first time around but once you find your routine it’ll become muscle memory.

Remember that you will only be in the market for a few hours at most, so this is not the type of options trading that’s being taught to retail traders. In fact this is how many institutional traders trade options on a daily basis and word has it a good number of those systems are IV related 😉

Structuring Correlated Signals

It is difficult to predict which of the four ETFs will trigger on any day and when. Thus I would suggest attributing your R size (e.g. between 0.25% to 1% tops) to the first signal that triggers (unless of course they come in quick succession, which happens quite a bit). If you then get additional signals you have the option to ignore them, or to simply close out a percentage of the first position and attribute that portion to your new campaign. No matter how you structure yourt exposure – you don’t ever want to assume a max loss of 1R size combined, which at maximum should represent 1% of your account principal.

For example, assume an account principal of $100,000 and an R size of 1%. You are receiving three signals in quick succession: long the UVXY, long the VXX, and short the SVXY. In this case you would spread your max loss of $1000 between those three symbols in any way you want. Please remember that IV ETPs do not move in unison, but are highly correlated by a factor of 0.8+.

Receiving Alerts

VIXEN sends out email alerts which are not particularly time critical. Many times you will be able to get a similar or better entry 15 or 30 minutes after the alert has been issued, thus leaving plenty of time to take action. Of course I don’t recommend that you digress or start hoping for better entries if you want to track the system as closely as possible. Unless stopped out during the session VIXEN closes all open positions at 3:53pm Eastern just before the session ends. VIXEN does not hold overnight and thus no overnight margin is required.

One more thing: You definitely will want to add alerts@evilspeculator to your contact list in gmail and perhaps even create a special tag/folder for it. This reduces the odds of any alerts being labeled as spam. Have fun and feel free to email me if you have any further questions. Or if you want to give VIXEN a shot then point your browser here to sign up for a free 2-week trial.