We’ve been 100% invested in XIV/ZIV throughout the month. When we’re having this kind of month, traders inevitably ask about taking money off the table. Calendar months shouldn’t matter in terms of measuring performance, but to a lot of traders they do.
My short answer is that the type of strength we’ve seen MTD is not, in and of itself, a reason to reduce exposure.
To illustrate, the graph below shows a trader going long XIV at the close when, sometime within the last 6 trading days, the XIV gained at least 13.4% over 15 trading days.
Those rules seem convoluted, but there’s logic there: yesterday was the 15th trading day of the month, XIV was up 13.4% MTD, and there were 7 trading days remaining in the month, so this is essentially modeling our current state and the days remaining in May.
Wonk note: this is a proof of concept, not a trading strategy, so I’ve ignored trading frictions.
The results aren’t stunning, but they’re not a reason to dread either.
Note that we’ve ignored some very important factors that a real trader would consider (term-structure, VRP, etc), which would improve results. This is simply showing that the strength we’ve seen so far this month, ignoring all other factors, does not by itself portend negative future returns.
Volatility Made Simple