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Update UVXY

I rolled my long UVXY put position.

music selection:  “I Saw The Light” — Todd Rundgren

UVXY is a horribly designed security.  It should be criminal.  The ticker attempts to track the daily movement in the ^VIX by purchasing the 14 and 40 day futures on the ^VIX and rolling the position daily.  Contango in the futures markets ensures that most of the time, they will sell a “cheap” asset to buy a more “expensive” one.  They compound the misery by using double leverage.  The security falls around 85% a year with great consistency.  I have come close to covering my entire budget by betting against this dog.

On 1NOV2017, I purchased UVXY190118P00010000 for 5.55 a share.  The underlying was around 15 making this about a third out of the money.  My position moved into the money this week and I have been looking for an exit since.  Today, I sold the puts for 6.35 a share.  The trade was in force for 63 days and yields 83.51% on an annualized basis.  I cleared 4,400 in profit on 55 puts.

I rolled down and out to UVXY200117P00006000 for 4.35 a share.  I bought 76 contracts for 33,060.  I’ll be looking to sell somewhere around the point UVXY hits 5.15.  This will probably be on a split adjusted basis as the underlying is overdue for another reverse split.

This is my highest conviction trade and has made me reliable 50+% annualized returns for years.  I’d likely not be FIRE without this trade.

Devour your prey raptors!

{ 11 comments… add one }
  • Steve January 3, 2018, 10:24 pm

    What’s the reason that people sell the option that you are buying? Are they assuming that a 2007-like event will happen in the market? Is it part of some hedging strategy, where they’re willing to accept the consistently poor return, since it protects something else?

    I think I’m ready to dip my toes in on UVXY options, but I’m interested to hear the other side of this trade.

    • The Lizard King January 3, 2018, 10:41 pm

      It can be one of two things (assuming the counter party is rational). The first is the market maker stepped in to fill your order. They used sales/purchases of the underlying and/or in offsetting puts/calls to create a fully hedged position. They in effect “took you” for a few cents in arbitrage profit thanks to their greater speed and access to detailed market data. That is their purpose in the market.

      The other is that it is large institutions that are putting on “small” (to them) hedges of their portfolio, especially if they have positions in the underlying ^VIX futures.

      Anybody selling those puts for income is just about stupid.

      • Chris B January 8, 2018, 2:41 pm

        I’m thinking about buying UVXY puts as part of a bearish vertical spread. This would either reduce my risk to the width of the spread or increase my leverage, depending how I play it. I.e. with risk limited to the width of the spread instead of the whole strike price, I could stand to allocate more to the trade. One downside is time decay would be neutral instead of working for me. It’s just a different risk/return profile.

        Also look up put/call parity. Arbitrage opportunities open up anytime the prices of options deviate too far from their opposites.

        • The Lizard King January 8, 2018, 4:35 pm

          There is a theoretical put/call parity opportunity in UVXY most of the time. It is problematic however as it require shorting the underlying to complete the trade. Since borrow fees tend to be quite high for UVXY, you can expect your profit to be wiped out.

  • financialfreedomsloth January 4, 2018, 5:11 pm

    I sold them the 29/12/2017 for 6,20 USD. At the time glad the order went through because they bobbed around 10 for days and days …
    And of course, what happens in the new year: a nice drop! Just my luck …
    Anyway, had a nice profit and got in today, also at 4.35 USD for strike 6

    • The Lizard King January 4, 2018, 7:55 pm

      Gogogogogogo! I think we will both do well.

      • financialfreedomsloth January 6, 2018, 1:39 pm

        I think so too! Scaling up the investment in this product bit by bit…
        That is one of the strong aspects of it: profits can immediately be redeployed and thus earn a return themselfs within the year ..

  • Joe January 4, 2018, 6:11 pm

    Hi, since volatility was at record lows last year would expect it to be higher this year. Do you think the UVXY puts will still be a good investment? It seems like they would due to the large amount of decay.

    I have bought the UVXY puts twice thanks to your rec. I got good results both time last year. Thanks.
    You mentioned your weight goals. Not sure how tall you are, and what a ideal weight range is. Exercise and low carbs will help. I am not an expert in this matter as I still have a somewhat fast metabolism rate luckily.

    Good luck and wish you a healthy, happy, and prosperous 2018.

    • The Lizard King January 4, 2018, 7:58 pm

      I don’t think volatility is subject to reversion to mean. It is (largely) a matter of animal instincts that follows no logic. I expect to continue to do well. Volatility spikes are only temporary setbacks. It is a pretty sure bet the underlying will fall more than 90% over the 700+ days I have till expiry.

      I’m 5’11” and didn’t need blood pressure medicine until 180 or so. Doctor agrees I can probably throw the pills in the trash if I can get back to 175. Stretch goal is 165. I lost less than 3 pounds in the 2017 calendar year…very disappointing. But I was down to 202 just before the holidays so 10 pounds a year is very achievable. I’m doing pretty well so far this week. Time will tell.

  • Kelly February 6, 2018, 10:35 pm

    Hi,

    I’m curious if you still had this trade on, and if so, how you managed the recent spike and crash. Must have been gut wrenching. I’m curious on your outlook for these products since the inverse like XIV had to be liquidated. Do you think they will keep UVXY around?

    • The Lizard King February 6, 2018, 10:50 pm

      The direct and direct leveraged products are unlikely to have 80% declines like the inverse products can and just did. They instead spike UP hard and this is considered desirable by the issuing institution. Since I hold long puts, there is a break on loss of value during a volatility event. While going farther out of the money, the volatility component of option pricing is going up. I got into the current trade (6 strike 17JAN2020) on 3JAN2018 at 4.36. Today, those puts closed at 4.35. I’m down but a trivial amount. This is why I buy the longest dated puts available. A short term put expiring this week would have been catastrophic. With the long dated put, I am almost certain to at least break even.

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