Feb 102012

Another swing trade? Where did this come from? Well this is a very unusual situation.

In our first swing trade we used the volatility index to correctly predict that the markets will become less volatile and move up. But yesterday as I was glancing over my watch list I noticed the VIX was really low (around 18.6), which means at some point it will probably revert back to its mean of around 20 to 30. So how can we take advantage of this opportunity? One way to play volatility is the Horizons S&P 500 VIX Short-Term Futures: Bull Plus ETF. Or, HVU on the TSX. It’s a long name, but the HVU is basically an ETF that tries to double the returns (or losses) of the VIX. In other words, if the VIX goes up 10%, then HVU should go up 20%. However, a 10% drop in the VIX means a 20% drop in the HVU.

So earlier this morning, Friday, Feb 10, I bought some HVU. Luckily, last month between working 2 jobs and my investment income I was able save more than $1,000 after paying for all my living expenses. So today, I used $1,000 of my own savings, and borrowed another $1,000 from my line of credit, to buy roughly $2000 of HVU.  This means half the money is my own, and half the money I’ll need to return once I sell the shares later. Details below.

Initial investment = $1000

Leveraged up to $1969.20

Bought 180 shares of  HVU.TO  at $10.94 CAD = $1969.20

I say this is a very unusual situation because normally I don’t swing trade unless I know there’s a pretty good chance (above 70%) that I’ll make money. But today I’m only about 60% sure I’ll make money, and 40% I’ll lose money (>_<) . But the reason I’ve decided to do it anyway is because betting on increasing volatility is also a hedge against the overall market. So even if I lose money with this swing trade, my buy and hold investments, which represent 90% of my portfolio will probably go up because these two types of investment instruments have a negative correlation to each other!

My exit strategy? If the HVU goes up by 10% to 30% I will sell it and take profits. If it drops by more than 50% then I might sell it and take my losses. This is the riskiest gamble I’ve made so far with my swing trades. I’m basically using leverage on top of leverage, lol.








Do NOT try this at home if you don’t understand all the risks involved. Like I said, I am willing to lose 50% of my holdings, which is about $1,000 of my hard earned cash on this because I think the potential for profit outweighs the dangers. But hey, who knows.Maybe this will be my first swing trade where I’m actually going to lose money( ゚ Д゚). I guess only time will tell. Isn’t this exciting? (^_^) Stay tuned in the weeks to come.

  10 Responses to “Swing Trade, Round 3: Buy – Hedging with Volatility”

  1. The horizon Vix is one I’ve been tempted to play for quite some time.

    I was considering slowly accumulating more and more units but because this product is rebalanced daily even if the market stays flat and the Vix stays where it is this etf will lose value.

    It’s a super duper short term trade with this one… Ideally less than a few days.

    Set a trailing stop with 20% trail and you’ll do no worse than a 20% loss.

    50% is too much! Unless you need the capital loss!

    • Great suggestion Cam. I didn’t think about setting a stop loss when I bought it. But now I realize it would have been a good idea to do so given how volatile this little ETF is, doh (>_<). I’ll need to keep a close eye on this one and like you said, keep the duration short, hopefully.

  2. Looks like it’s going to work… HVU.TO is up 18.85% already today! (Wish I’d seen this post earlier!!) :p

    • Thanks for the vote of confidence Neil >^_^< I’ve never owned anything with this kind of volatility before so this is quite exciting for me. Everything falls on the trading session on Monday now. There’s still a chance I could lose big on this, and I am prepared to take that hit. But of course I hope you’re right and this upward trend continues next week =^_^=

      • Where did you pick up swing trading? Any particular blogs or resources that sparked your interest?

        • Last year I decided to try something more exciting than value investing. I’ve heard about day trading, but I don’t trade big volumes, so after commissions, I don’t think I’ll make very much. I googled different ways to trade, and read a lot of articles including this one from investopedia. A swing trade takes longer than a day trade, so it allows for a bigger movement in the stock price, so the profits are bigger and won’t be completely eaten away by fees. I became interested in this idea, so I gave it a shot.

  3. Still holding or did you close out your position?

    • Still in my holdings unfortunately. I missed my chance to sell it awhile ago, too bad >_<. If it keeps going down I’ll probably get rid of it once it gets below the $5 range.

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