The easy approaches to the market that worked so well in 2012 and 2013 have performed poorly so far this year. We're more than a quarter through 2014, and the S&P 500 is up just 0.78% for the year, with several dips so far into negative territory. Short volatility plays, which became hugely popular in recent years, have also seen mixed results. VelocityShares Daily Inverse VIX ST ETN (XIV) is down more than 9%, indicating that it hasn't paid to be a consistent seller of short-dated CBOE Volatility Index (VIX) futures.
However, there are some brighter spots: VelocityShares Daily Inverse VIX MT ETN (ZIV) has gained 3.5%, continuing a run of outperformance (relative to XIV) that we noted at the start of the year. A conservatively allocated strategy that trades delta-hedged VIX option straddles is up nearly 4%. And a diversified volatility strategy that combines systematic trading in VIX futures, VIX options, and SPX iron condors has gained more than 12% this year net of transaction costs.
All of these approaches are a few steps off the beaten path - you won't find boxes for them in a Morningstar style guide. But when there are strong cross-currents in the market, it helps to employ strategies that don't depend on the same factors to which everyone else in the market is looking. This year, one of the best sources of returns has been the passage of time. A short gamma trade like an iron condor or a short straddle can profit even if expectations for future volatility don't decline. Round-trip swings down and up again in stock indexes may prove frustrating for buy-and-hold investors and momentum traders, but market gyrations that come to nothing still take time, and time is money.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Jared can be followed on Twitter at twitter.com/CondorOptions
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV