Introduction to Volatility Trading

Excerpted from The VXX Trend Following Strategy:

For many years, professional traders have built strategies around the concepts of buying and selling volatility in the market. Historically, this meant buying options when implied volatility was perceived to be “low” (and therefore option prices were relatively low as well) and selling options when implied volatility and option prices were determined to be “high”. Unfortunately, quantifying such strategies was difficult or impossible for the typical retail trader.

More recently, a number of different volatility products have been introduced into the marketplace. These include VXX, VXZ, UVXY, TVIX, and several others. At the same time, interest in volatility trading has exploded. While volatility trading was traditionally used as a method to hedge a portfolio, people are now increasingly interested in trading volatility directly, for its own sake. In that sense, volatility is becoming a new asset class with its own unique qualities that set it apart from equities, equity ETFs, commodity ETFs, or options, though there are also certain features that are shared among these classes.

In this strategy guidebook we will focus on VXX, as it was one of the earliest volatility products on the market (meaning we have more data available for back testing) and also has higher trading volume than its peers. The VXX Trend Following strategy presented here will provide you with precise, quantified rules for entering and exiting your trades. Historical results will allow you to evaluate how effective different variations of the strategy have been over the three and a half year lifetime of VXX.

Without further ado, let’s move on to the rules for the VXX Trend Following strategy.

End of Excerpt

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