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Update UVXY

I rolled UVXY today.

music selection:  “Tales Of Brave Ulysses” — Cream

weigh-in:  204.2 (0.4)

I’ll get to UVXY shortly but first up is SIRI.  My old position expired in the money over the weekend and shares were called away.  I wrote a new put to stay in the trade.  I sold SIRI171110P00005500 for 19 cents a share.  The trade will be in force for 40 days and yields 31.52% annualized while enjoying 3.63% downside protection against a decline in share price.  Very tasty.

I had a good till canceled sell order open on my UVXY puts at 12.55 which triggered this morning.  It is important to use a limit order and not pay the bid/ask spread.  But I don’t think I’ll use a good till canceled order again.  Contracts were going for 12.74 shortly after my shares cleared at open so it looks like I left some money on the table in exchange for some minor convenience.

The contracts were originally purchased at 11.57 on 12SEP2017.  Selling today at 12.55 resulted in the trade being in force for 20 days.  The annualized yield is 154.58%.  Very nice!  That soothes my butthurt over leaving some money on the table.

I’m going to do some A/B testing to see if it makes sense to go into the money on this trade instead of always going out of the money.  Somehow, I have never tried this.  I bought this morning, UVXY190118P00015000 for 8.55 a share.  I also bought half as many contracts of UVXY190118P00025000 for 16.80 a share.  On the first, the time value will increase as the underlying decays.  On the second, the opposite will happen but that will be offset by gaining intrinsic value as this contract is already in the money.  The second contract also starts off with a penalty of requiring more capital outlay to enter.  I think from some paper trading assuming the middle of the bid/ask spread that the returns will actually be very similar.  If I am right, I will switch to going in the money as this is a move that also reduces risk.

Devour your prey raptors!

{ 34 comments… add one }
  • kimobear October 2, 2017, 10:03 pm

    The results of the side by side testing would be interesting to compare.
    Specially since the risk is different.
    As I said before, to me the big unknown is…… VIX spikes and the results.
    Have you ever looked into writing options on SVXY?
    These have been very rewarding in my IRA.

    • The Lizard King October 2, 2017, 11:55 pm

      I’ll be reporting the results of the A/B test here.

      I have never tried SVXY. It climbs a reverse wall of worry and then craters horrifically.

      • David October 3, 2017, 2:47 pm

        Long SVXY is long contango + short VVIX
        Short UVXY is long contango + long VVIX

        When VIX is as low as it is these days, any market disruption sends VIX up a few points, which is a lot in percentage terms. Long SVXY is better if markets are calm since it compounds daily, but any disruption will erase all gains.

        That said, it seems SVXY IV goes down when VIX is low, which feels backward. There might be an edge in buying more UVXY puts and hedging them with SVXY puts. A market crash will kill SVXY and make UVXY skyrocket. Some reversion after volatility will kill UVXY while maintaining SVXY at a similar level. Calm market will grind UVXY lower every day. That last one might be the worse outcome, but I’m thinking it would still be green.

        • The Lizard King October 4, 2017, 2:25 pm

          I think you may have your exposures wrong?

          Long SVXY benefits from declining or flat ^VIX.
          Short UVXY also benefits from declining or flat ^VIX.

          They are essentially the same strategy. Right? You could maybe short both to hedge exposure.

          • David October 4, 2017, 8:30 pm

            VVIX as in volatility of VIX. That’s a big difference.

          • The Lizard King October 5, 2017, 12:13 am

            Gotcha

  • catfishwizard October 3, 2017, 3:27 am

    It seems to me that once the LEAPS puts go ITM, they don’t really “gain” intrinsic value in the way you would expect. As the underlying plunges into the money, the premium goes up a bit to reflect the extra intrinsic value, but it’s not dollar for dollar. It’s like a lot of the extrinsic value just kind of tuns into intrinsic value because everyone knew that would happen anyway?

    Also it seems to me like the premiums hit an asymptotic wall around a $6 breakeven…which is usually where the underlying goes through its reverse splits.

    This is such a weird and beautiful trade. So much fun.

    • The Lizard King October 3, 2017, 3:50 am

      catfishwizard,

      It is really difficult to find a good source of historical options pricing info. So the only way to know is to A/B test. I’m doing that.

      • Chris B October 3, 2017, 1:14 pm

        For A/B testing, a paper trading account like many brokerages offer might be a valuable tool. With a paper trading account, you could try over a dozen strikes and/or strategies and really hone in on the optimal approach.

  • Brian C October 3, 2017, 3:31 am

    I’ve been selling naked calls on UVXY most of the year and it’s worked out very well. Mostly after a big spike in the vix to >15. I’d rather sell the option premium and capture the time value than pay for it on the put side. Time value, and contango working in my favor.

    • The Lizard King October 3, 2017, 3:52 am

      I did that back in the day. I’d only caution you not to get greedy. At one point, I was selling monthly premium of 40,000 per month. I was getting rich fast. When the “Greek Crisis” hit, I lost quite a lot more than my annual salary in about 1.5 hours. Forrest Gump’s Mamma says “stupid is as stupid does.” But the Lizard King says “stupid is as stupid doesn’t learn from its own mistakes.” Don’t repeat my mistake.

    • Chris B October 3, 2017, 1:30 pm

      I’ll take the puts. Selling naked calls involves infinite loss potential as the shares rise. In a panic, UVXY could easily quintuple, driving the leveraged value of calls through the roof. Then comes the margin call and you’re forced out of the trade at the worst possible time.

      Long-term long puts offer (a) time to recover from a VIX spike without fear of margin calls, and (b) loss potential limited to 100% of cash outlays.

      • catfishwizard October 3, 2017, 3:18 pm

        No margin also means you can do the long put trade in retirement accounts!

      • kimobear October 3, 2017, 3:52 pm

        Agree whole hardily with your observation of selling puts having limited risks vs selling calls with unlimited risk and possible margin call. The problem I run into is trying to get accurate data to see the pricing changes during spikes and reverse to the ,median data.

        • kimobear October 5, 2017, 3:17 am

          Correction I meant buying puts vs selling calls. Putting the glas of Port down and reading it again before I hit send next time.

  • financialfreedomsloth October 8, 2017, 3:34 pm

    I am still in the trade as I like to make at least 10% before exiting and I got in a bit higher than you. Probably reach the 10% return on Monday.
    Very interested in the A/B testing. Since I want to do UVXY puts in three different accounts I manage I have been looking for a way to scale trading in it, this could provide it …

    • financialfreedomsloth October 11, 2017, 4:47 pm

      and sold today at 13,05 USD, return a little bit over 10% in less than a month. I like it!

      • The Lizard King October 11, 2017, 8:47 pm

        Nice! Out of the money is beating ITM so far. I plan to sell around the time the underlying hits the 15 range (my lower strike).

  • hvgotcodes October 11, 2017, 7:19 pm

    We were discussing this on the MMM and you helped me set up my first trade. Thanx! Decided to bring the conversation to your blog.

    I’m failing to intuit how buying ITM vs OTM would be better given that the strategy appears to be buy these long-dated options, then sell when you reach some predetermined profit (e.g. 10 or 15%). If you were holding longer and trying to make a profit by exercising the option I could see how buying one might benefit….

    If I buy one option with a 10 strike, and another with a 20 strike, and then price of the security, whatever it was, drops $2/share, don’t both options improve in value by the same amount? i.e. does a drop in share price affect all options equally?

    Unrelated, I’m curious, have you ever done this trade, bought some contracts at some strike x, and then had the security increase in value by 10x or something like that? What’s the largest hole you’ve ever been in?

    • The Lizard King October 11, 2017, 8:55 pm

      Thanks for reading.

      The Time Value component of the Intrinsic Value component of the premium behaves differently depending on how close the strike is to the underlying. There is more time value as a percentage of strike at the money than away from it. So an out of the money put has accelerating TV until it reaches the money while the in the money has decelerating TV as the underlying decays. The in the money put also gains intrinsic value which the out of the money put does not enjoy. So far the out of the money put is winning the race. I’ve long felt out of the money is better but have never done an objective test. It was time to “know” instead of go with a “hunch”.

      I’ve bought before and had the underlying shortly thereafter go up by a little more than a double. The damage is not as bad as you might think because the volatility premium offsets some of the loss in time value. That was the 5 strike put bought on 9SEP2015. I had to hold for 315 days (22JUL2016) to dig out of the hole and still managed to turn a 15.63% annualized profit.

      Technically, there is a non-zero chance of losing 100% of your put investment so don’t bet the farm. I allocate 10% which is money I can afford to lose and still remain FIRE.

      • hvgotcodes October 12, 2017, 5:46 pm

        Looking at the google chart for uvxy, anyone who bought PUTS on May 24, 2013, where the price was at 12,220, was in a world of hurt by mid June when the price was over 150,000. According to that chart it seems it took all the way until Feb 2015 to drop to under 12k. So during that period even the longest dated PUTs might have been in trouble.

        I’m poking around the link Chris B shared. It seems my thought that change in the underlying price affects all strikes the same was just wrong, and that makes sense.

        • The Lizard King October 12, 2017, 7:14 pm

          Yes. It isn’t likely to happen often but there is a non-zero chance of a 100% loss of investment. Over a long period of time with lots of repetitions of the trade, it should be a huge winner. But an excessive allocation to the strategy will eventually lead to a ruinous loss.

          • hvgotcodes October 12, 2017, 8:34 pm

            Seems to me that the safe strategy is to have a pipeline of contracts. Divide your total investment by 12 and then invest that amount each month. I have no idea how to maintain the pipeline given that the contracts will all sell at different times, but its a start….

        • The Lizard King October 13, 2017, 6:16 pm

          12,220? Typo? Yahoo Finance history shows 125,600 close on that date. The “gain” would then be much smaller?

          • hvgotcodes October 13, 2017, 8:21 pm

            I was using the chart shown to me by google when i type uvxy into the browser. May 24th, 2013 is at 12220 and by June 21 the price was over 150k. I wonder if a reverse split occured. The first contract I bought (the $19 strike) is close to triggering on my GTC sell order at 13. In Fidelity I see the ask price is 13, but bids are only at 12.35.

            I own 3 contracts at the $17 strike, where I also have a GTC limit to sell at 13, and the prices on that strike didn’t seem to move at all today….

          • The Lizard King October 13, 2017, 8:51 pm

            I show a reverse split 1/10 on 10JUN2013

    • Chris B October 12, 2017, 2:45 pm

      “If I buy one option with a 10 strike, and another with a 20 strike, and then price of the security, whatever it was, drops $2/share, don’t both options improve in value by the same amount?”

      The answer is no. Look up the delta of each option. Delta is the expected change in the value of the option per one-unit change in the value of the stock. A typical delta for a UVXY put might be -.15 which would mean if UVXY declines $1 the option would increase $0.15, all things being equal. In reality, all things are never equal. Volatility and interest rates are constantly changing. Delta changes over time too! So the effect can be obscure. Plus, the option often costs less than the stock, so in percentage terms this can be a big or small swing. Finally, with UVXY’s wide bid-ask spreads, it can be hard to look at a quote and understand whether you’re up or down in the short term, especially after hours when the spread widens.

      Delta will be very different at the $10 strike than the $20 strike. This is partly due to differences in the probability of being ITM at expiration.

      See this article for a better explanation. Actually, this whole site should be required reading before making even a simulated options trade. And as lizard pointed out, never bet the farm.

      https://www.optionsplaybook.com/options-introduction/option-greeks/

      • hvgotcodes October 12, 2017, 5:47 pm

        Thank you for that link. This is very helpful. So now I am curious, is the time value or intrinsic value the key to buying long dated PUTs with the intention of selling as soon as a reasonable profit can be made?

        • Chris B October 12, 2017, 9:48 pm

          The person who buys a UVXY put is making a directional bet – that UVXY will decline – against a computer at an investment fund that has calculated a sort of bell curve of probability outcomes based on the historic volatility of the shares. The buyer is betting that the computer selling him/her the puts got its probability and pricing wrong. They’re betting that the probability of the puts being OTM is actually greater than the computer estimates because s/he has reason to believe so much more of UVXY’s volatility will be to the downside, due to the structure of the fund. The options pricing equation used by the computer – in theory – does not incorporate this information and treats UVXY like any other stock that has a 50/50 chance of rising or falling tomorrow. The computer does not read the prospectus where Proshares emphasizes the high probability of loss if the investment is held more than a day.

          So I guess my tl;dr answer is time value.

          Buy as long-dated as you can, so that you can wait out a 6-9 month bout of volatility if it occurs. If you have a cast iron stomach, you might be down 75% only to find yourself up 50% later.

          Also, why take reasonable profits ASAP, when you can take unreasonable profits by holding longer? I’m up about 45% on a Jan’19 position I entered in late July. I’ll sell when there are only 6-9 months remaining on the contract – unless I make an adjustment to buy more duration or delta.

          tl;dr #2:
          I’m keeping my eye on 2 things: I want a high delta and a low theta.

          • The Lizard King October 12, 2017, 10:36 pm

            Taking profits quickly and repeatedly might not seem to make much sense on the surface. But I think the math of being short is instructive. If you hold a stock ABC short and it declines say 50%, you want to load up on more short shares. If the shares ultimately end up down 75%, the original shares only declined another 25% while the new short declined 50% again. Likewise, if you are long UVXY puts and they have already declined 90%, you have to wait for another 50% decline to get to the 95% mark. You are holding potentially for months for pennies of additional profit at that point. You capture more of the decay by rolling frequently. That is, there are eighteen ten percent declines (compounded even) in any 85% trend. That’s profit on 180% worth of decline versus 85%.

  • Chris B October 16, 2017, 6:27 pm

    I see your point about directly shorting a stock and about doubling down strategies (which involve trading an increase in risk for an increase in leverage) when a stock falls, but do long puts really work that way?

    I agree with rolling long puts to a later expiration date, but the farthest-out UVXY puts (currently Jan 2019) are replenished only every couple hundred days, so that would be a several month holding period.

    Assuming we’re looking at sticking with a given expiry date, are you suggesting swapping one’s puts for other puts at a different strike price? E.g. selling one’s $17 strike (delta=-0.14) to buy twice as many $10 strikes (delta=-0.10)?

    If that’s what you mean, couldn’t you just divide price by delta down the line and find the strike price that will experience the biggest % move during the next $1 decline in UVXY? Some quick Excel work shows this most volatile strike to be the lowest strike price ($5 strike selling for $2.07 with delta = 0.054 would change 2.5% per $1 change in underlying). Of course, once you’re at the lowest strike, there’s nothing else to optimize amd no need to trade until expiration gets uncomfortably close (unless markets are made for even lower strikes in the future).

    • The Lizard King October 16, 2017, 8:44 pm

      Chris,

      It makes a lot of sense that the farthest out of the money strike would have the highest delta. That is the strike with the most risk!

      I’ll try to model it out. It might help to follow along with a spreadsheet to see the math. The key point is in the time the underlying can fall from ~16 to about 5, it can fall the distance from 16 to 15 (6.25%) about 18 times. [16 * 0.9375 ^ 18 = 5.0073]

      The most recent trade for the 5 strike is 2.10. That is 42% of the strike. Likewise, the most recent trade for the 15 strike is 9.40 or 62.667%. And the 16 strike is at 10.22 or 63.875% of the strike. Let’s use the ceteris peribus assumption from economics for simplicity. If all else is equal, the 5 and 15 strikes will be worth the same 63.875% of the strike when it is as near the money as 16 is now. That gives us by extension, 3.13 pricing for the 5 strike and 9.58 pricing for the 15 strike. The 5 strike has returned (gross) 49.21% while the 15 strike has returned a lessor 10.84% gross return. But it takes a lot less time for the underlying to reach 15 than five so you can roll repeatedly. About 18 times in fact. So 10.84% * 18 = 195.12% gross return.

      In reality it will be even more than that for the frequently rolling approach as compounding will take place. Actual returns will be lower in both cases (usually) as time decay will erode some of our premium while we wait. Volatility events can skew everything above. So for an eyeball estimate of what balances all my concerns out, I like to go about 1/3 out of the money. That could surely be optimized with backtesting but I don’t have access to a Bloomberg Terminal. I’ll try posting my excel work below but WP will probably scramble it:

      premium strike % at expiry gain gain % times 18
      2.1 5 0.42000 3.133333333 1.033333333 0.492063492
      9.4 15 0.62667 9.58125 1.019281915 0.108434246 1.951816433
      10.22 16 0.63875

      0.9375

      1 16.00 15
      2 15.00 14.0625
      3 14.06 13.18359375
      4 13.18 12.35961914
      5 12.36 11.58714294
      6 11.59 10.86294651
      7 10.86 10.18401235
      8 10.18 9.547511581
      9 9.55 8.950792107
      10 8.95 8.391367601
      11 8.39 7.866907126
      12 7.87 7.37522543
      13 7.38 6.914273841
      14 6.91 6.482131726
      15 6.48 6.076998493
      16 6.08 5.697186087
      17 5.70 5.341111957
      18 5.34 5.007292459

  • Chris B October 17, 2017, 4:01 pm

    Thanks Velociraptor, I believe I see what you mean. You’re thinking 4-dimensionally and I’m thinking 3 – or maybe 2.

    To make sure I’m clear, I’ll repeat it back: We’re talking about rolling downward in the strike prices, as UVXY falls, increasing the number of contracts as your puts appreciate. E.g. something like: Buy 5 of the 15 strike today. In 3 weeks trade for 6 of the 10 strike. Later pick up 7 contracts of the 7 strike, etc. Doing a snowball effect. I get the mechanics so far, but I’m still fuzzy on how to select any particular strike or decide when it’s time to trade.

    I think my choice of brokerages is skewing my behavior. When trades cost $8 each, it is less appealing to make constant adjustments to a relatively small position, so that leads me to think in terms of what I would buy and hold longer term. I’m on the verge of going with IB; my rationale until now was that my commissions have been less than the $20/mo they charge. But if it’s blinding me to opportunities, I need to move.

    • The Lizard King October 17, 2017, 5:03 pm

      Chris, you have it. I allocate 10% of the portfolio to a strike that is about 30% out of the money and target to sell at the money. There are several such opportunities per year. I roll down to the new -30% strike for however many contracts it takes to fill up my allocation.

      I usually pay about 75 cents for each options contract at IB. Sometimes it is less. They even pass through from the market maker so there have been a few trades where my commission was a NEGATIVE 3 cents. I can’t recall ever paying 2 bucks or more per contract. Commission for trading underlying equities are also reasonable. For my commission type and size of position, I usually pay the 1 dollar minimum.

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