volatility-short
Fading a volatility spike or climax
What defines it
You can use the 5m bar on VXX, the idea is that most of the time volatility spikes are mean reverting in 2 main cases. First case the SPY had a massive quick drop in price, making VXX have a similar move to the upside, this kind of trade usually resolves within 10 minutes. The other case is when we have a gradual uptrend, ending in a climax with a big bar that either drops fast or starts making lower lows.
What makes it work
An RSI 14 alert over 70 makes for a great starting point to look for an entry. On the lower lows variation, placing a stop above the top of the climax usually pays off and gives a decent risk reward. A quick spike most times happens within 1 minute or less, even if the trade can be held for a few more minutes. The bar will look very disproportionate to the rest of the bars and the stop can be very close to the entry. Comparing against SPY for capitulation moves improves your odds, but it's not always necessary, since VXX can spike on its own without a matching SPY move.
Examples
all 7 →About the same time it reached the high of day, SPY had a doji with good volume, but it didn't go up too much on VXX, so I didn't want to short yet. Instead, I waited for it to break the uptrend to get in. I didn't like how slowly it was dropping, so I used a tight stop once it reached around 1x reward.
Second wave of the day ended in a big-volume bar, similar look on SPY. Consolidated for a few bars, and you get an entry at the low of the consolidation. The push looked pretty aggressive, so lock in some and move the stop to the entry price to finish the trade and protect profits.
It goes up all morning, ending on a climax around the same time SPY capitulates on big volume. Short as it starts to come down from that, selling some on the next big push, and the rest as it bounces back up.
Really sharp move at the opening, it went vertical for some time. First short opportunity there, and covered after the high of the last bar was broken. Second short in the afternoon, SPY is consolidating - we have a push just below the morning high and start to have lower lows. I took the second trade, sold half after the first push, and the rest after breaking the high of the first green bar. SPY 5m right corner for reference.
SPY had a sharp drop and started gaining momentum back. VXX lower lows right after that and that was the entry. The bars were bigger and we had a small gap up in price on the 5m bar right before the top. Unfortunately it didn't keep going so I stoped out when we took out the previous high, taking almost half of my risk. The doji at the bottom with big volume made me want to get out early.
SPY had a sudden drop and I got an alert that RSI for VXX was above 70. I saw it hang around the 21.62 cents for a few seconds which made an easy entry to short into the pop and sell around 3 minutes later And this is how the SPY looked like when VXX spiked, it was a huge dip in less then 1 min