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Update UVXY

I have finally re-entered the UVXY trade.

music selection:  “Tik Tok” — Ke$ha

Buying long dated puts on UVXY remains my highest conviction idea.  UVXY attempts to track twice the daily movement of the ^VIX by daily rolling the 14 and 40 day futures.  The 40 day futures will naturally almost always be more expensive than the 14 day futures as there is more time value to be accounted for.  Economists call this contango.

The long term effect of repeatedly selling a “cheap” asset to buy an “expensive” one is for UVXY to decline an average of 87% a year.  There are sometimes sharp price spikes but the long term trend is irreversible.  You can pick up some pretty easy money by buying long dated puts and holding for a short period of time to capture this decay.

Today, I bought UVXY190118P00020000 for 11.57 a share.  I’m targeting a minimum holding period of 30 days and looking to sell any time my annualized return exceeds 50%.  I’ll then roll down and out.  Annualized gains so far this year include 26.92% over 48 days, 65.43% over 28 days, 24.16% over 175 days, and 587.56% over 6 days.  Cash profits are 7,966, making up the largest portion of my options related income for the year.

Devour your prey raptors!

{ 23 comments… add one }
  • Chris B September 12, 2017, 6:14 pm

    1) How do you select a strike price? Based on Delta, the $25 strike might have been a bigger mover.

    2) How do you avoid owning puts during UVXY’s frequent reverse splits, when one gets the double whammy of being further OTM and controlling fewer shares?

    3) Is it tempting to wait and enter this trade after one of the little volatility events we’ve experienced lately? Seems like UVXY usually corrects to a trendline quickly after each of these (see Monday’s performance).

    • The Lizard King September 13, 2017, 2:17 am

      1) I stick my finger in air and take a wild assed guess. Experience tells me about 1/3 out of the money is the sweet spot.

      2) The reverse splits have never been a problem for me. I find they sell just as well if you set a limit order and be patient for an hour or so.

      3) The volatility events cause the price of the puts to spike. This price spikes fades as the volatility subsides so it is about a wash for return but you take on more risk. I prefer to buy when vol is already “low”.

      • Chris B September 13, 2017, 1:43 pm

        Thanks!
        I am also pursuing the $20 strike with a limit order today. My strike price selection rationale is that the price of 2 contracts conveniently uses up all the spare cash I’m willing to speculate. :))

  • Chintan @ Alpha Trading September 12, 2017, 6:24 pm

    Long Puts! How do you cope up with Theta Loss?
    Most of the time market is bearish for a shorter period of time and bullish for a longer period of time.

    • The Lizard King September 13, 2017, 2:18 am

      UVXY is the only name I’ll buy long puts on. The rate of decay in the underlying is so reliable and so fast, it has always overcome theta for me.

    • kimobear September 17, 2017, 5:20 pm

      good question
      I was wondering about the Theta effect also.
      Been tempted many times when looking at the long term value chart of UVXY but have not been able to find any historical info of actual trades and how they worked out during spikes.

      • The Lizard King September 18, 2017, 12:33 am

        I’m thinking next time I roll, I’m going to buy multiple strikes to do some A/B testing.

  • Justin WW September 13, 2017, 5:30 pm

    Hi Lizard King! – Care to share what your AA looks like wrt the whole port? What % in DGI, high yield, discount bonds, UVXY? I’m looking to run something similar and advice for someone who’s living off proceeds would be valuable!

    Thanks

    • The Lizard King September 13, 2017, 7:03 pm

      Asset allocation varies from time to time depending on options assignment. But the base that rarely changes is 40% closed end debt funds, 10% UVXY puts, with the remaining half or so roughly evenly split between high yield MLP, REIT, BDC, and short options plays. Dividend Growth is trivial to me unless it is part of the short options strategy. My tIRA has longer term holdings and is mostly insurance plays. Hope that helps.

  • Seb Loeb September 14, 2017, 2:44 pm

    that music choice tho…

    😀

    • The Lizard King September 14, 2017, 8:49 pm

      Haha. It’s stuck in your head now…

      • Seb Loeb September 20, 2017, 4:25 pm

        I did join in on this one. I like your uvxy posts.

        When you calculate your ROI, are you using trading days or calendar days as the denominator? In the short 6 calendar days since purchase, according to my math, my puts are up a whopping 193%. I’m not looking to sell immediately as I think the re-entry would not be as profitable as holding for more dollars over more days.

        • The Lizard King September 20, 2017, 4:41 pm

          Seb,

          I use calendar days to calculate annualized returns and assume 365 day year. I’m also up nicely but holding till the underlying hits 20.

  • financialfreedomsloth September 14, 2017, 6:17 pm

    I got back in the trade as well, but I had to pay 11,75 USD. Oh well, that’s what I get for letting it completely slip my mind yesterday (getting old).

  • David September 14, 2017, 7:43 pm

    Would it have been better to not sell them 1 month ago during the spike?

    LEAPs put seem to be a long bet on the number of VIX spikes on top of the contango. The VIX spike raised the realized spikes count which explains the increased price of the options even though UVXY raised by 25%. Since VIX spikes are rare events, the market probably prices fewer expected spikes than the historical average.

    When one is in the making, the odds of VIX going back down and causing big decay on UVXY rises significantly. As long as you believe VIX will return to previous levels or lower in the future, I’m thinking there’s little reason to get out of the trade during a spike.

    • The Lizard King September 14, 2017, 8:51 pm

      During the last spike I was a seller not a buyer. Premiums grew fat to a degree not consistent with the move in the underlying ^VIX. Any gains to be had from rolling down would have been largely muted by the reversion to mean of that premium on premiums. If you play UVXY with naked calls it makes perfect sense to sell into spikes. On long puts, it depends.

  • MU September 21, 2017, 8:10 pm

    hi, do you have a stop loss for this strategy? Thanks.

    • The Lizard King September 21, 2017, 9:25 pm

      I probably should but I don’t. I feel pretty confident that with a long time horizon of over a year, the play will always produce if not a positive return, a survivable loss. Stop loss here if you want one should probably be based on a percentage move in the underlying instead of a move in the premium which can sometimes be a little irrational.

    • Chris B September 22, 2017, 9:46 pm

      The easy way to limit losses would be with vertical spreads. This strategy might also yield more because you could control more shares with less buying power or margin.

  • Mike September 29, 2017, 3:28 pm

    So I am new to this strategy. Can you help me understand why you are buying puts on UVXY instead of buying a product like XIV. Under either method you benefit from the backwardation of products trying to track the VIX. I see a benefit to XIV in that you don’t have to sell your puts and buy new puts every 30 to 120 days.

    • The Lizard King September 29, 2017, 8:31 pm

      XIV will not appreciate at the inverse of the decay of VXX a year due to some mathematical peculiarities. It can be a good ticker to hold when the market is smooth but frequently gets cut in half or more during volatility events. I’ve held it before but watched my stops closely. Going short VXX or UVXY is a more certain bet in terms of the probability of turning a profit (a stop loss strategy on XIV frequently results in being stopped out a loss). Using puts also gets you some leverage, boosting returns.

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