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“Volatility is always present in the market and creates opportunities in both ways: big returns or big losses. Investors can make money on the pricing and volatility of volatility itself,” according to Edgar Nava, President and Head Trader, Grove Wealth Management.

Grove Wealth Management is an investment advisory firm at the marcus evans Latin Private Wealth Management Summit Fall 2018 taking place at Bahia Grand Panama, October 8-9.  

How can investors take advantage of volatility variations? 

Nava: Volatility is the degree of variation in price of securities along time. It is always present in the market and creates opportunities in both ways: big returns or big losses. Volatility is generated by the unpredictability of events and the repercussion on the markets, that makes people swing between optimism (the bulls) and pessimism (the bears), moving prices accordingly. Investors can benefit from volatility by trying to predict big movements in price and betting on securities accordingly (long or short). The bigger the movement (therefore the bigger the volatility), the bigger the profit. But you can also make money on the pricing and volatility of the volatility itself. We have developed techniques of investing in volatility that back-tested show consistent results because they increase the odds in our favor.

Can you tell us more about that? 

Sthory: The techniques are based on human investment behaviors and have been back-tested to determine degree of success. They behave well under many scenarios and phases of the market cycle, but of course we have also developed additional supra strategies or rules to adapt them to the changes of scenarios. It is like making basic clothes (pants and shirts) that work pretty well under any weather condition, but then you need accessories (sweaters, raincoats, coats, etc) to make them more efficient under tougher conditions (rain, cold, etc).

What are your investment criteria?

Nava: If we are only talking about volatility, the critical strategy is to be mostly short and avoid being long for extended periods of time. Common human perception is that the current time is the worst ever and the end of the world is coming soon. You can find this kind of sentiment and comments from World War I, World War II, tense episodes during the Cold War and even today with the terrorist attacks; and yet the human race has progressed and succeeded. This overly negative perception of the future makes volatility generally overpriced. Then being short in volatility pays off because most people are averse to volatility, paying too much to hedge it, and in financial markets this is a window of opportunity. But of course, financial black swan events and bear markets occur repeatedly. The key is to avoid or mitigate them.

What risk management strategies would you suggest?

Bracho: In our strategy Tactical Short in Volatility (VIX), we are not permanently short in VIX. There are periods of time we are in cash, and just occasionally long. We have identified entry points that make the trade safer and increase the odds of success. In Trade Formation, we mitigate risk by using a stochastic approach and the Law of Large Numbers. We place many small short option trades in a variety of different indexes and securities, and then exit the trade when the residual premium is not worth the risk. It is like an insurance company that insures many different cars. Some of them will generate claims but thanks to the Law of Large Numbers on average you will obtain a profit. On top of that, we reduce risks by closing a position before expiration, if the desired profitability is reached.

How do you use technology? What specialized tools optimize investment strategies?

Sthory: We believe in using technology to monitor, identify, evaluate, execute and organize trades. That is why we have developed a series of proprietary software platforms that allow investors to execute the trading strategies we have developed, for many accounts, in a homogeneous way. Not using technology for trading in the financial markets is to give an unfair advantage to your competition.

For example, our sentinel software scans the market evaluating several features of the securities. The App generates candidates, then selects the contracts that best meet your dynamic criteria. Once target criteria are met, the software automatically opens a new position. The Auto-Pilot app continuously monitors the performance of the positions by comparing the position’s market value vs the expected one, i.e. algorithmically calculated daily value. If the performance meets your defined criteria, the software will perform - automatically - the exit trade and close the position.