Strategies

Managed Volatility Portfolio

Risk Versus Reward

The strategy behind Managed Volatility Portfolio is deceptively simple.

The best time to invest in the long VIX is prior to a spike. This is, in our opinion, nearly impossible to do with any consistency. But the best time to invest in the short VIX is during a spike in volatility. That is something that can be observed and then acted upon. There is, of course, a problem. It isn’t possible to know when the spike in volatility has reached its peak. This would be the absolute best time to invest but for the same reason we can’t know when the VIX is about to spike, we can’t know when it has reached its peak. So a patient, disciplined strategy is required to achieve our objective. We use our years of experience hedging the S&P 500 through our Measured Risk Portfolio core strategy and apply it to the VIX. We write cash secured puts to get paid to take the risk of buying the short VIX when it spikes with a fraction of the total portfolio. As the VIX elevates and the short derivative declines in value, we continue to make additional purchases while simultaneously hedging against catastrophic losses. This last part is vital, as the potential for a 100% loss of principal exists in these instruments. Our goal is to be able to sustain multiple purchases over several months if necessary in order to potentially prevent deploying our capital too early. Options play an integral role in the strategy including complex option spreads. Spreads and other multi-leg option strategies can entail substantial transaction costs including multiple commissions which will impact any potential return. These are advanced option strategies and can involve greater and more complex risk than basic option trades. Please review the Characteristics and Risks of Standardized Options prior to trading options.

The simple truth is this: The MVP strategy can and will suffer significant monthly losses. But in exchange for this volatility, there is an excellent chance that we will be able to hedge out the most significant drawdowns and capture much of the upside potential of this highly volatile investment over time. You are strongly urged not to try this on your own. The strategy requires discipline and, frankly, courage to execute. When the market turns bearish and the strategy is losing value rapidly, the most common human response is to quit. And it is precisely in this moment that you can rely on us to invest while avoiding the novice investor’s desire to sell.

Our strategy is only suitable for those investors with a high degree of risk tolerance. Discuss our strategy with your own financial advisor in order to determine if or how much of your portfolio you can allocate to MVP.