The COVID-19 pandemic disrupted financial markets like never before, creating an extraordinary playground for volatility-focused strategies. From January to April 2020, the S&P 500 (SPX) and VIX (volatility index) presented traders with unique patterns and opportunities. What happened during this period holds valuable lessons for those who know how to read the signals.
The First Signals: Late January 2020
In January 2020, market conditions seemed calm. Rolling volatilities for SPX and VIX hovered within predictable ranges. But by late January, subtle shifts appeared—the VIX rolling volatility spiked unexpectedly. For those monitoring volatility signals, this was the first sign of brewing instability.
What We Did:
We recognized this deviation as a cue to prepare. By analyzing the interplay of SPX and VIX rolling volatilities, we identified an optimal entry for 3-month straddles. These positions were structured to capitalize on impending price swings, regardless of direction.
The Market's Breaking Point: February 2020
By mid-February, the dominoes began to fall. SPX entered a sharp decline on February 20, triggering massive volatility. Both SPX and VIX consistently flagged deviations from their historical norms. Option premiums soared, but the real story was in the timing.
What Set Us Apart:
While many chased late-February volatility at inflated costs, our January straddles were already in place, reaping profits from the downward price movement. This foresight turned potential panic into opportunity.
March: Navigating Peak Volatility
March 2020 was the climax of market turbulence. SPX rolling volatility reached over 3%, and "True" signals for SPX became the norm. However, on March 13, the VIX flagged "False," indicating that implied volatility had peaked. This was a critical inflection point.
Our Strategy:
Rather than chasing high IV, we adapted. Knowing that volatility crush could erode option premiums, we shifted focus to tactical directional trades, leveraging SPX’s sustained volatility while avoiding the pitfalls of inflated VIX options.
The Hidden Gem: Mid-April 2020
By April, the market began stabilizing. SPX started a recovery, and both SPX and VIX rolling volatilities declined. The mid-April period was a standout opportunity for those attuned to volatility cycles.
Precision Timing:
We identified mid-April as an ideal time to re-enter straddles. Lower IV made options affordable, and the SPX recovery provided the price movement needed to unlock value. Calls took center stage, delivering significant returns.
What This Means for You
Signals Matter: Subtle shifts, like late-January VIX spikes, often precede market-shaking events.
Timing is Key: Late entries in February or March carried high costs and risks. Early positioning is crucial.
Adapting Pays Off: Volatility crush post-March 13 taught us the value of flexibility in strategy.
Intrigued?
What we've shared is just the tip of the iceberg. Our unique approach combines meticulous signal monitoring, strategic timing, and adaptive execution to navigate volatile markets. If you’re interested in learning how we refine and apply these strategies, let’s start a conversation.
The next storm is always brewing. Will you be ready to seize the opportunity?
Disclaimer
This report is provided for informational purposes only and does not constitute financial, investment, or trading advice. Market conditions can change rapidly, and this report reflects publicly available data as of December 20, 2024. For personalized advice, consult a licensed financial advisor. Neither the authors nor distributors accept liability for any losses incurred directly or indirectly from reliance on this information.
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