How to Day Trade Volatility ETFs

How to Day Trade Volatility ETFs

Submitted by adil on Wed, 08/06/2014 - 19:35

When Should I Trade Volatile ETF's?

Day trading volatility Exchange traded funds can prove very attractive at times. But there are moments when people should keep distance from volatility ETFs. Volatility ETFs have an inverse relationship with major market indices such as S&P 500. With the rise in S&P 500, volatility ETFs will face a decline. With the fall in S&P 500, volatility ETFs will see a rise. As trends develop in market indexes, volatility ETFs too has development of trends. Since their relationship is inverse, a great uptrend in S&P 500 shows that there is a downtrend in volatility ETFs, and vice versa. Big moves that occur in volatility ETFs at reversal points of major market can be exploited by day traders.

Choice of Volatility ETF does matter

Day traders may choose from a number of volatility ETFs. It can be an inverse volatility ETF. An inverse volatility ETF moves in the direction of major market indexes. In this regard, simple and high volume is considered to be the best choice for day trading.

Perfect Timing for day trading ETFs

With the decline of S&P 500, VXX usually sees massive moves. These moves are greater than what are seen in S&P 500. For example: if S&P 500 faces a 5% drop, VXX will have a 15% gain as a result. Hence VXX trade has more potential than simple short selling of S&P 500 SPDR ETF. VXX sells off dramatically when the S&P 500 improves because VXX shows a tendency of overshooting in case S&P 500 declines.

Day traders can make profit by buying VXX on the decline of S&P 500. Then they can sell VXX after a spike when S&P 500 begins to recover and improve again while VXX starts to fall.

How day trading can be done

Just like VXX, volatility ETFs leads S&P 500. VXX is used for foreshadowing various moves in S&P 500. Therefore it can help in day trading stocks at moments when no substantial volatility in S&P 500 is observed.

If S&P 500 SPDR breaks a bit above from its intraday high, VXX drops further down to its intraday low. This weakness in VXX really helps in confirming that S&P 500 has strength and that it is likely to exceed its daily high limit following the pullback of 11 am.

The biggest opportunity in the day occurs in VXX if there is a significant drop and/or improvement in S&P 500. Whether these significant moves are present or not, the next entry and stop are used to extract profit from the volatility ETN.

If VXX is much weaker than the S&P 500 near 11 am, the S&P 500 SPDR gets back to the low of the day. As for VXX, it stays well under its daily high. This shows that there is opportunity on the short side in VXX.

When VXX is strong and S&P 500 is weak, the same case applies. VXX moves higher so you have to wait for a pullback and a consolidation or pause. You have to put a stop just below the low level of pullback when the price breaks above the top level of consolidation at the bottom of the pullback.

The key factor

During day trading volatility ETFs, trade only in the direction where the trend is going on. Just wait for a pullback or a pause. Enter in the direction of the trend at the moment the price breaks out of the small consolidation.