Larry is an established author in the trading and equities space, and I thoroughly enjoyed our conversation about market dynamics, trading psychology, VXX pricing structure, and the future of the industry with regards to automation. As you listen to this podcast interview, notice the very similar structure and thought process that both Larry and I share about creating mechanical, data-driven event signals that can be replicated in any market environment. This, I believe, is why traders who use a more systematic approach end up performing better than those who are driven by their emotions and psychology of the environment.

Interview Overview:

• Larry is one of the authorities in the options and trading space.
• He has authored 7 books, including his latest book, Buy the Fear, Sell the Greed
• Larry looks at trading in a very systematic fashion, which matches what we try to do as options traders.
• His perspective provides a lot of parallels to options trading and another way to understand how markets function.

• In this interview, we discuss Larry's history and how he got into trading.
• We discuss the volatility opportunity that arose during Brexit.
• We also talk about VXX pricing and how to take advantage of it using options strategies. 
• We learn why Larry says this is the golden age of options trading. 
• Finally, we finish off the interview with a focus on automation, the future of trading, and where technology is going.

Larry's Background:

• As a child, Larry was interested in stock and received some for his birthday.
• He began trading in college and found his way into penny stock trading. 
• It took seven years for Larry to build his trading up to a full-time business when he was 34 years old.

Buy the Fear, Sell the Greed:

• In times of great stress, the lower part of your brain kicks in, and people become irrational.
• The structure of your brain changes when fear comes into play.
• Eventually, in times of fear, irrational decision-making takes place in all walks of life.
• Fear has been hard-wired into who we are; it's part of our DNA.
• Logical thinking is replaced by overwhelming emotions, on both the retail and institutional level.

The Structure of VXX:

• VXX was brought on in 2009 as a reaction to the market sell-off in 2008.
• The VXX product was intended to protect traders and investors from market sell-offs.
• When it first came out, it looked like it was a great idea conceptually. 
• Jump ahead a year, VXX lost 60-65%. After 3 years, it had lost over 90%, and by 2013-2014, it had lost over 99% of its value. 
• This is just a reminder that VXX has structural inefficiency combined with a behavioral inefficiency. 
• Looking at the structure and chart, VXX was basically built to go to zero.

Two Structural Aspects with VXX:

• Contango: VXX needs to sell the front-month futures options and buy the following month's. In most cases, over 80% of the time, they are selling low and buying high.
• Underlying Contract is VIX Futures: The VIX is purchased as portfolio insurance (the main intent of creating the VIX). Most insurance is overpriced, and VIX has historically been overpriced since it was created because of the difference between implied volatility and historical volatility.

The Scaling Component

• Mean reversion: in the equity markets, nothing reverts back to the mean as well as the S&P.
• When you get into volatility, it reverts to the mean even greater than the S&P does. 
• When using the scaling or laddering approach, it's essential if volatility is going to revert to its mean, VXX has to drop in price.
• As volatility goes up and VXX goes up, adjust your position size higher accordingly.

Case Study: VXX Options Strategy

• The simplest way to construct an options strategy for VXX is deep in the money puts, 80 Delta or above. 
• Structure the trade based upon how long you will be holding the position. 
• The VXX market maker is willing to play and keeps an efficient market. 

Time, Price, and Scale (TPS) Strategy:

• As ETF's become oversold, it is often for behavioral reasons. 
• Fear can be induced in the marketplace by an event coming into place, or money managers pausing from buying.
• RSI and the 200-day moving average are great indicators for scaling into trades and which style of strategy should be deployed.
• The 200-day moving average plays a big role; volatility substantially increases when markets and ETFs are below the 200-day moving average. 
• The average gain per trade and the percent correct is greater when it's above the 200-day moving average. 
• When you consider the day-to-day volatility of the movement it is like night and day.

Marko Kolanovic Story 

• Marko is a chief strategist at JP Morgan with a tremendous amount of influence.
• His team does high-level work on derivative markets and how it affects the overall markets. 
• JP Morgan put out a report on the amount of short volatility positions and Brexit, which ended up going viral. Panic set in over the weekend based on the report, which sent the market plummeting the following Monday. Taking the other side of trades like this is hard, but when panic sets in, great trading opportunities result--opportunities that come from other’s fear.

Using Stops

• There are potentially better ways to protect your positions than using stops. 
• Consider using options to protect positions instead of stops to get more “around the clock” protection for positions.

Automation and Computerized Trading

• At the end of the day, if you are trading systematically, that is, in a sense, computerized trading. 
• You can place the set of rules into your execution platform, and the trades get executed.
• This rule-based and quantitative approach is trading systematically — automated.
• Fear and greed are inherent in the market and inherent in those who create computerized trading strategies. The edge that results from fear and greed should remain regardless of whether the trade is placed manually or is automated.