Karpel’s Corner: How to Trade Volatility

Welcome to Karpel’s Corner. This is where I throw out my thoughts on the markets and share some of my favorite strategies. I keep it market-focused, and never miss an opportunity to teach trading strategies and commentate on the latest trends affecting the financial markets. Hope you enjoy today’s post!

Lieutenant Colonel William “Bill” Kilgore (Robert Duvall) delivers his famous line in the movie Apocalypse Now, “I love the smell of Napalm in the morning, it smells like victory”.  Now I do not want to infer that a market Apocalypse is in the making, but with the spike in volatility I have had some of the best set of trading days in a long time. It is not that I was in a lot of shorts, I was net long the market, with 80% of my portfolio in long high quality equities. I had compiled these equity names using the Trade Ideas Tool. I scanned our database using the short term and long term Score of 10, and have had 9 stocks in my portfolio for the last month.

You might ask how I invested the remaining 20% of my portfolio. VOLATILITY. I bought a mutual fund that trades the VIX Futures called the Armor Fund ($RMRAX). The Armor Fund is up to 24% in the last 30 days. I am showing a positive 30 day P&L of $2000 on my $100K account over the last month. I have lost roughly $6400 on the equity portfolio, but the VIX portfolio is up $8400. This is worth mentioning because the core of my position is the equities, 80%. I wanted a hedge that was non-correlated to my equity portfolio; this is where the Armor Volatility fund came into play.

I chose the fund versus the ETF that tracks VIX ($VXX) because this is an actively managed Futures fund. This fund has a reasonable expense rate and would not lag if volatility really spiked. I used a ratio of equity to volatility exposure of roughly 4.5 to 1. For every $4.5 of equity exposure I have $1 of volatility exposure.

We used the Tradespoon Bull Stock Screen to find the stocks. I have to give credit to our partner Joe Cusick from MoneyBlock, who married the volatility component to the portfolio. Having this type of volatility exposure in my portfolio will be a main stay. Look for new webinars on this topic in the near future.

Joe wanted me to mention that if you are looking for an adviser who specializes in using these very tactics, feel free to contact him by e-mail, [email protected].

See you next time at the Corner!