Day Trading Volatility

How is it possible that some folks make money during a period of extreme market volatility? Day trading leveraged ETFs and volatility indexes or hedging against the market. This blog post is not for long term investors so readers beware! I, myself, am a long term investor 95% of the time but I do have capital set aside to day trade during volatile periods in the market to take advantage of the large swings. I also do have capital set aside to take advantage of this historic period of purchasing equities at a significant discount and I have been dollar cost averaging daily into the market and will do till everything is back up and roaring higher. However, this blog post will be to discuss the instruments used to day trade in times like this. P.S. I am not a financial adviser, so please do your own independent research regardless of what is mentioned in this post.
Volatility Index and the theory behind it
There is an exhaustive list of volatility indexes complied in a database. The volatility index is the square root of the risk neutral expectation of the integrated variance of the S&P 500 index over the next 30 calendar days, reported on an annualized basis. It is typically used as a fear gauge for market confidence. Market volatility (standard derivation of log return) is a crucial determinant of investment decisions. Some investors may trade on volatility, rather than directional bet on prices. Volatility is a hidden stochastic process that is not directly observable, unlike the index value. It is likely to grow when uncertainty and risk increase. After a large volatility spike, the volatility can potentially decrease rapidly. After a low volatility period, it may start to increase slowly. Chicago Board Options Exchange (CBOE) volatility index (ticker symbol VIX) on S&P 500 index has become the standard measure of volatility risk in the US stock market. VIX expresses volatility in percentage points. It is calculated as 100 times the square root of the expected 30-day variance of the rate of return of the forward price of the S&P 500 index.
Leveraged ETFs
To start off with, on average the S&P 500, for a really long time, moves up or down by about 1% every day. We have been experiencing three times that or more over the past couple of weeks. When you layer a triple leverage ETF such as TQQQ (long) or SQQQ (short), you get +/-10% daily swings as the new normal. Leveraged exchange traded funds (ETFs) use the futures markets to magnify the returns of a specific index. Leveraged exchange traded funds (ETFs) either look to double or triple the daily return of an index, or return the opposite of an index. The first ETF, the State Street SPDR Standard & Poor’s 500 ETF, was launched in 1993. Since then, the industry has rapidly expanded with ETFs accounting for over $4 trillion in assets. The first leveraged ETFs didn’t appear until 2006. Although these products only occupy a small space in the entire ETF universe, their popularity has grown due to the possibility of higher returns in a very short period of time (provided that trends remain favorable). In 2019, ProShares and Direxion are leading the leveraged ETF space. The majority of the most popular products are coming from these issuers. Better suited to short-term trading opportunities, leveraged ETFs usually don’t make an appropriate long-term investment strategy due to the expensive cost structure that comes with the high level of trading needed to maintain the fund’s positions. Many popular leveraged ETFs have expense ratios of 0.95%. Leveraged ETFs can be highly volatile and the risk of principal loss with these funds is significant. One particular ETF is DUG (ProShares UltraShort Oil & Gas ETF). ProShares UltraShort Oil & Gas seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the Dow Jones U.S. Oil & Gas SM Index. In the past month, DUG has seen close to a 200% increase in price. I did buy and sell this instrument at a profit but it does require time to frequently monitor entry and exit points. Two of my favorite leveraged ETFs are TQQQ and SQQQ, depending on what direction the market is taking that day, I can ride the wave till I find a good exit. The ProShares UltraPro Short QQQ ETF (TQQQ) offers three times daily long leverage to the NASDAQ-100 Index. This ETF uses a modified market index, looking to target the largest NASDAQ-traded securities, but it also excludes financial stocks. Since the NASDAQ 100 is dominated by technology companies, the performance of this ETF is largely dictated by the performance of the technology industry. The ProShares UltraPro Short QQQ ETF (SQQQ) provides three times inverse exposure to a modified market-cap-weighted index of 100 of the largest non-financial issues listed on the NASDAQ. Like the ProShares UltraPro QQQ, the performance of this ETF is largely dictated by the performance of the technology industry which dominates the NASDAQ-100 index.
The bear market has given rise to great buying opportunities for both long term investors and short term active traders. Long term investors should be preparing their grocery carts for companies with great balance sheets that they can increase their holdings while they are currently on sale while short term active traders should be paying attention to current events while thinking about entry and exit points during the course of the day.


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