Trade of the week: short VIX

Since the spike may give way to a retracement we would like to short the VIX index at 19.43 with a stop loss at 20.43 and a downside target at 17.43.

(Partial video transcript)

Previous Tesla trading outcome

Axel Rudolph: Hello and welcome to this week's "Trade of the week" on Monday 3rd February, and what a start to the month it has been. Volatility has increased dramatically, and that has had an impact on all asset classes. But let's start off with our trades from the beginning of January. We had a Tesla trade on, and you can see that, unfortunately, that trade just got stopped out before the Tesla share price went back up again. We had our stop-loss down here at the early January low, and we got stopped out last week. So, that was a 2% loss with regards to that trade.

Previous S&P 500 trading outcome

And then what we also had on, from a couple of weeks ago, was a long S&P 500 trade, which looked good because we went back up towards the all-time high. But we've now gapped lower, as you can see here, because of President Trump imposing 25% tariffs on Mexico and Canada and 10% tariffs on China. So what do we do now? Do we keep our stop loss down at the January low and risk 2% of our capital? Or do we just bite the bullet and take a small loss? Because, after all, we got into this trade about 30 points higher.

So, with regards to percentages, we are probably risking, I don't know, 0.3 percent or something like that. That would be my preferred scenario, simply because I don't want to have the risk of seeing what the US market will do later on, when it opens properly as well, it could be a beginning of a trade war, which could have a hugely negative impact on financial markets, and the gap we've seen so far with Friday's low might actually stay in place for a while.

It might get slightly filled over the next few days. Who knows? But the risk is simply too big. So for me, I'd just get out here with a very, very small loss on this position. And last week we went long the oil price. We did so at $74.00 on WTI, as you can see here on the Daily Financial Bet (DFB). We had our stop-loss down below the August low because we had a confluence of several lows and highs coming into this major support area.

And lo and behold, we bounced off that support area, I believe it was on Friday, and, since then, we are currently heading back up again towards our entry level at $74.00. So, we should keep our stop-loss at just below $71.00 on that trade.

This week's trading opportunity

Which brings me to this week and, quite frankly, I personally wouldn't trade. Sometimes the right thing is to not trade, basically. Sometimes it's better to wait and see what happens and don't trade. So that's what I would do personally.

But because you want me to look at a Trade of the week, I'm going to give you one and that is to go short the VIX. So let's just have a look at the chart, and you can see the Volatility Index has risen and we have a gap. And the question is whether, if the US opens later on we will see that gap being closed, or whether we could see a further acceleration in the VIX, in the Volatility Index, the Fear Index, like we saw in December. Now if you want to do that trade, it's a very risky one. As I said, I personally am not going to trade it.

But if you wanted to do so you could potentially sell at 19.43 on a minor bounce. And then you have a stop-loss just above these highs here, going back to October of last year, and you just place it above that high of 20.43 with a downside target just below the gap closure around 17.43. So in theory you could then make a 2-to-1 reward-risk trade on that. But it's a very risky trade and sometimes it's better not to trade.

So this week's "Trade of the week" is to short the Volatility Index, but at higher levels at 19.43 with a stop-loss at 20.43 and a downside target at 17.43.