≡ Menu

Update UVXY, SPY hedge, FB, TSO

Busy day in the market for me.

music selection:  “Welcome To The Black Parade” — My Chemical Romance

I was able to close out the UVXY position in my tIRA account.  I initially purchased the Jan 2019 10 strike puts for 6.05 a share on 21OCT2016.  Today, I unloaded at 6.50 a share.  The trade was in force for 45 days and yields 60.33% on an annualized basis.  I have not rolled to a lower strike yet as I have to wait for cash to settle.

The Italian referendum over the weekend was “NO” vote which is the condition I was hedging against.  This almost certainly means “Quitaly” and possibly the death of the European Union as a whole.  The markets shrugged in response.  I closed my hedge for a 182 dollars loss including round trip commissions.  I’d do it again.

In my tIRA account, I closed ABT, ADM, and AMLP.  I replaced them with shares of Facebook (FB).  Facebook trades at an attractive PEG ratio, is executing well, and returning cash to shareholders via buybacks.  I see this as a capital efficient business that can compound wealth for a long time.  I do not have enough shares to write covered calls against the position.

I also closed my short position in refiner Tesoro (TSO).  TSO diversified its operations with an all stock buyout of a competitor in Texas.  The thesis was that the difficult regulatory environment in California would continue to cause the company to struggle.  The markets cheered the purchase and the short thesis is now less clear.  I closed with a loss 348 dollars or 6.95% (45.31% annualized).  I am sticking to my guns on my other shorts.

Devour your prey raptors!

{ 9 comments… add one }
  • Mattia December 6, 2016, 9:28 am

    Hello

    I just wanted to ask, since UVXY seems to be your flagship option investment (since it’s so easy to predict and make money out of), what’s the catch? I mean, there are no free lunches, so… where’s the risk in that? I know you talked about how and why you do this investment, but I don’t think you ever said the risks involved in this particular move. There must be something that adds at least a 1% chance of failure, right?

    Thank you and don’t be too negative about the EU: Italy can’t get out of it because the costitution doesn’t allow it as easily as Great Britain, I think.

    Cheers!

    • The Lizard King December 6, 2016, 5:13 pm

      The failure case comes if VIX spikes and then stays elevated for the entire ~18 month holding period. The put has to expire out of the money to be truly worthless, else it has some Intrinsic Value. The worst I’ve ever done is 16% annualized and its a risk I’m prepared to take.

  • David December 6, 2016, 5:02 pm

    In the same vein, I’m also wondering why UVXY puts vs SVXY long. It seems that in both cases, you will lose all capital if VIX remains high or in backwardation. Also, SVXY usually recovers rapidly after a VIX spike.

    Did you calculate the return on capital for both strategies or is there another reason why you go with UVXY puts?

    • The Lizard King December 6, 2016, 5:19 pm

      There is a weird trick of arithmetic that works against short bias. If an investment falls 50%, and rises 50% the next day, it is not at break even. A long series of ups and downs tends to create decay even if the up and down moves are a similar size. This works against SVXY (a drag on returns) and absolutely hammers UVXY because of the 2X leverage. You could do a similar options trade with SVXY by doing a modified synthetic long. Write a put and use the proceeds to pay for an out of the money call. You get some leverage that way but you miss out on the built in 2X of UVXY. SVXY does has a technically unlimited upside while UVXY can only fall to zero and no lower. But I wouldn’t count on it going to a literal infinite price. I prefer UVXY to SVXY for these reasons.

      • David December 7, 2016, 2:10 pm

        Thanks for sharing!

        Reason I’m asking is when I look at leap otm puts, it feels like there is very little upside potential left. Jan 2019 Strike 5 going for 3.20 means the absolute maximum profit is 1.80. It feels like a very small window and whoever will buy back your put will have an even smaller window. Getting out of the position sounds like mission impossible.

        By comparison, long SVXY feels easier to get out of after a volatility crush because of its liquidity and the upside potential is uncapped.

        It might be because VIX has been low the past week, so I’ll keep an eye on it in the coming weeks.

        • The Lizard King December 7, 2016, 4:51 pm

          Say for example you need a drop of 33% in price to hit your target profit in UVXY puts. UVXY has already fallen 88% this year. Lets call 80% decline annually the average. There are a little more than 15 33% drops a year to get down to an 80% loss. You can expect to compound this trade on average several times a year. The worst I’ve ever done is 16% annualized and I’ve done as well as 500% annualized. That’s before compounding. That should be “enough” return to keep anyone happy.

  • Steven December 6, 2016, 7:14 pm

    UVXY would have provided substantial gains during the spikes in volatility in 2008 and 2011.

  • Ray December 7, 2016, 4:14 am

    Hi Is there a way to get an email each time you have a new blog post? Like an email alert? Thanks.

Leave a Comment

CAPTCHA
*