Periodically we like to review new options strategies, by analyzing recent trades as well as possible trades using the new strategy. Back in 2006 Ultra ETFs rolled out for trading, but options were not realistically available until recent months when volume and liquidity became sufficient. Technical traders must realize that ETFs are different from stocks; they typically move slower, but limit risk exposure. That being said, there are three unique types of ETFs: traditional, actively managed, and Ultra, and each type requires different research and trading strategies. We'll focus on Ultra ETFs for today's TrendWatch, and a potential strategy that we're currently watching. We've noticed that the ultra volatile ETFs can be traded effectively on signals from the CBOE Volatility Index (VIX).

In the last month the biggest mover in the stock market wasn't Google (GOOG) or Dryships (DRYS); it was Ultra ETFs like UltraShort Financials (SKF) and UltraShort Real Estate (SRS). The UltraShort Financial (SKF) was as high as $211 on Tuesday and in three days lost $75 bucks, an easy quintuple on the upside or downside in the last two weeks! The obvious downside is that these can move against just as fast as they can move in our favor. As with all options trading we need an effective method in determining the big, short-term moves, and it seems the VIX works incredibly well in signaling profitable ultra trades.

As we search for those double and triple winners this may be a great strategy, but the fact is the signals are few and far between, so this type of strategy could supplement our current system, not replace it.

SKF With VIX Signals


At first glance the signals above may not look perfect, but using a disciplined system can yield big returns. The system capitalizes on the high volatility and the large moves that accompany increasing volatility. Before we look at another chart take a look at this type of strategy.

Simple System to Capitalize on Volatility

* Wait for 1 daily close above the upper Bollinger Band on the VIX
* At next open buy UltraShort Calls or Ultra Puts: 1 month out, in-the-money, no more than 50% time premium
* average holding period: intra-day to 2 days

Seems simple, right? The most successful systems usually are the most simple; the variable is the traders' management (or discipline). For example, the ETF Options Trader recently traded UltraShort Real Estate (SRS) call options, specifically the July 95 strike.

SRS With VIX Signals


We locked down a fast 105% profit to eliminate risk, virtually playing with the market's money. You can see in the chart above that this simple system would have yielded more than 100% multiple times for the UltraShort Real Estate ETF. Remember, if we could not find options to meet our criteria in SRS, we could conversely look at the Ultra Real Estate ETF (URE) and buy puts. This is another advantage to ETFs, two assets are tracking the same index, which could double our options choice and provide a better chance of pricing exploits.

When the next market bottom nears (we're not out of the woods yet) we'll keep an eye on the VIX and Ultra ETFs,and be poised to profit from the volatility that others run away from.

Price Headley is the founder and chief analyst of BigTrends.com.