Issue 31: Volmageddon. - Masters in Trading Digest

Volmageddon

Welcome to Issue 031 of Masters in Trading Digest.

In today’s FREE MIT Digest, we notice an overlapping pattern that happens in late February, is this a coincidence?  

Or, are there other undercurrents at work that produce this consistent behavior? 

We take you back to Volmageddon, when the market saw a sudden risk with the rise in volatility on 5 February 2018 which led to a one-day loss of more than 90% in the value of short volatility exchange-traded products (ETPs).

Stay safe out there.

Good investing,

Jonathan

Is Volmageddon Here?

Hey, it’s Pablo Lucena…

Since I began trading full time in 2018, after obtaining much-needed education, community, and learning some pro tips, (Masters In Trading education); I've noticed a repeating pattern that happens around the same time each year – it’s a pattern that I refer to as the MIT Special.

February of 2018, 2020, and now 2022, in particular the week of 2/24, there have been periods of time where something seems to happen in the broader market resulting in large volatile moves.

*Feb of 2019 – massive rally (no event)
*Feb of 2021 – bank regulation kicked in, Fed starts reverse repos (no event)

2018 – it started on 2/5/2018 with the so-called “Volmageddon“. 

There was a large one-day VIX spike. Several inverse and double/triple leveraged ETN/ETPs blew up; further feeding the volatility fire. Venezuela's currency collapsed. Yields were rising as all this was going on as the Fed tapered and hiked rates.

2020 – the COVID pandemic. Market-wise, it was on the days of 2/21/2020 and 2/24/2020 that volatility really spiked and markets sold off. We didn't see the bottom until mid-March 2020. 

2022 – with risks elevated starting the new year, of course, the Russian tensions with Ukraine escalated none other than in this same week of February. 

Thus, it seems like odds favor some sort of volatility-inducing event during most years at this time of February. 

In all cases resulting in a selloff, weeks leading up to it have plenty of “signs” we take note of so we may capitalize on the move. We have plenty of proof from 2020 and 2022.

What did all these incidences have in common? Large rallies after the panic selling stops. We, too, will keep monitoring these conditions. 

What's nice about the 2/24 MIT Special is that we have a good grasp on the timing, should it manifest. This allows us to position accordingly, and have a clear way to tell if it's happening or not. We also have the rally that follows as our second trade. In case you feel more comfortable playing from the long side after the coast is clear. 

The rally is yet another opportunity that has been remarkably profitable each time there's been a selloff trade observed in February. And just like we can see signs of the market about to tumble and position accordingly, we too have several metrics that would alert us on when it would be prudent to consider covering our short exposure and buying the dip.

To great trading!

Pablo – Masters in Trading Tooling

8 Part NFT Series

Watch the series, NFTs Explained Simply

Masters in Trading Digest - Issue 31

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FINAL THOUGHTS

WHAT TO EXPECT IN THE NEXT MIT DIGEST

Here’s what I’ll be exploring this weekend in preparation for our Sunday Week Ahead Trade-Ideas.  Learn more about getting Sunday’s trade.

The chart above shows Oil volatility against Gold volatility.

We are now seeing one of the biggest disconnects we have seen going back 5 years.  This has me curious, and this weekend I will explore opportunities to capitalize on this dislocation.

Keep your feedback coming into support@mastersintrading.com.  We’re excited to share your feedback along with fantastic suggestions for upcoming issues.

Until then, trade smart and always manage your tail-risk.

Thanks for reading,

Jonathan Rose

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