Building Long Volatility Position With Shares (3-9 Month Hold)
I'm beginning to build a long position in TVIX, the 2x leveraged long volatility ETN. While some say you can't use technical analysis on a leveraged fund chart like TVIX, I personally believe it can be done using a log chart. This play is based on both technical and fundamental analysis. I'm purchasing shares for this trade rather than options to avoid the theta bleed that would occur if a volatility spike is still 3-9 months away. I see the potential for a strong (20-50%+) move in the VIX, both on the weekly and daily chart (earlier bullish divergence and now higher lows on the indicators with building buy volume followed by low-volume pullbacks) as well as fundamental risk factors that could support this type of fear in the US market (fear of a potential recession leading to decreased consumer spending, along with the unwinding of momentum stocks and the re-emergence of value and yield-seeking investors). The US market is coming to a tipping point where economic good news may become bad news for stocks (risk of fed reserve discontinuing stimulus + fear of growing debt). Additionally, the "bad news is good news" effect we've seen for the past 2 years may be over, as value/cyclical stocks as well as bonds/yield are MUCH more sensitive to economic conditions than the "momentum" names most of us have enjoyed riding through much of this bull market cycle. While there's a decent chance that the fear of recession simply leads to more FOMO as stocks continue to climb (along with a BTD on the momentum stocks), the opportunity to hedge against the continuation of this historically long bull market at such a low price point / strong Reward to risk ratio is too difficult to pass up. While selling SPX covered calls or buying puts may also work, I like the flexibility of holding shares of TVIX with a medium-term time horizon.
Unwinding this trade, were it to work, may be a tad tricky, as leveraged ETN's tend to be extremely volatile, and the volatility on volatility itself is potentially very difficult to time. As a result, I'm setting 3 hard targets/limit sells for this trade as well as a soft stop loss that will be trailed on any spikes. I may consider an add and reduce if we trade sideways without stopping out.
I'm not calling a top on the bull. I AM recognizing that protecting gains through a hedge of some sort is more important now than ever before.
Unwinding this trade, were it to work, may be a tad tricky, as leveraged ETN's tend to be extremely volatile, and the volatility on volatility itself is potentially very difficult to time. As a result, I'm setting 3 hard targets/limit sells for this trade as well as a soft stop loss that will be trailed on any spikes. I may consider an add and reduce if we trade sideways without stopping out.
I'm not calling a top on the bull. I AM recognizing that protecting gains through a hedge of some sort is more important now than ever before.
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