I have two new trades this morning.

music selection:  “Back In The U.S.A.” — Linda Ronstadt

weigh-in:  205.2 (1.2)

No positions expired over the weekend.  I have seen some nice recovery since the correction ended.  The UVXY puts remain well underwater however.

Brighthouse Financial (BHF) is an insurance and annuity provider that was recently spun off from Met Life.  They came out the gate reporting an accounting loss that appears to have hurt shares.  This is to me irrational as most of the P&L in the first quarter was non cash spin off related charges.  In addition, sales of annuity products grew about 25% in the first quarter.  The company is clearly more nimble as an independent than as a division of Met Life.  I like the prospects for this business at the current price.  Therefore, I sold BHF180420P00055000 for 2.20 a share.  The trade will be in force force for 54 days and yields an expected 27.04% annualized while enjoying 5.66% downside protection.  I’ll be glad to be assigned at 55 and begin writing covered calls on the position.

Another new position is in Scott’s Miracle Grow (SMG).  There is a lot of hype around marijuana stocks right now.  I expect most pot investors are going to get burned.  I still want exposure to the space so I’m going with a classic “picks and shovels” play.  Scott’s has a fast growing indoor and greenhouse gardening segment that sells both nutrients and equipment.  It is a high margin business that is capturing the leading market share when it comes to supplying marijuana growers.  To that end, I sold SMG180420P00090000 for 1.90 a share.  The trade will be in force for 54 days and yields an expected 14.27% annualized while enjoying 3.30% downside protection.  Assignment would result in being eligible to collect a dividend stream that currently exceeds 2% and grew at a rate greater than 10% from 2016 to 2017.  Covered calls for bonus income would also be an option.  I think there is very little downside for SMG.

Devour your prey raptors!

Monday Trades 20.65% annualized returns

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8 thoughts on “Monday Trades 20.65% annualized returns

  • February 27, 2018 at 1:32 pm
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    UVXY Jan 2020 puts would have been fine due to volatility drag, but they just screwed every option holder by changing leverage to x1.5 without advance notice.

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    • February 27, 2018 at 6:48 pm
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      Is that what happened? I was trying to figure out why the options went irrationally low today.

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    • February 27, 2018 at 10:44 pm
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      Thanks for pointing this out. It is the first I have heard of it. Confirmed here: http://www.proshares.com/funds/uvxy.html

      “*As of close of business on February 27, 2018, this fund’s daily objective multiple changed from 2x to 1.5x. All returns prior to February 28, 2018 reflect the 2x daily objective multiple.”

      Reply
      • February 28, 2018 at 7:50 pm
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        In terms of “should I exit the trade” I’d like to know how their implementation of 1.5x leverage will differ from 2x leverage. Will they use different duration futures contracts, keep cash on hand, etc? If UVXY’s natural decay has decreased from 90%/year to only 60%/year, it’s still a good short. If they’re adding some kind of shock absorber that counteracts contango, not so much.

        I suspect this week’s options action reflects this uncertainty more than anything, but it also might reflect optimism that VIX futures will not be as propped up by ETFs in the future as they were in the past. (But we should keep in mind, UVXY sank like a rock even before the short vol trade became popular.)

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        • February 28, 2018 at 8:54 pm
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          I’m still waiting for them to clarify the same. They seem to be keeping a tight lip.

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  • February 28, 2018 at 10:07 pm
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    The prospectus basically says they’ll use their spreadsheet to hit 1.5x the index’s performance in the judgment of the sponsor however they deem fit (wouldn’t that make it an actively traded fund rather than an ETF? I digress.). It offers few details other than a description of the VIX’s method for maintaining a 30d weighted average duration. How they multiply this by 1.5x or how this has changed since the days of 2x is not described.

    Interestingly their website lists as a top UVXY holding the “IPATH ETN S&P 500 VIX ST (VXXIV) GOLDMAN SACHS & CO.”. I’m not sure if this is VXX, but basically UVXY is now invested in their competitor (perhaps due to an inability to trade contracts???).

    Sure enough, the prospectus also describes recent increases to the margin requirement and decreases to the maximum position size being imposed on VIX futures trades by market makers. That’s why all this happened. The rules changed and UVXY could no longer function as usual. Proshares got margin called!

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    • March 1, 2018 at 1:09 pm
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      They changed the holdings last week by adding swaps in addition to futures, probably in an attempt to maintain 2x exposure. That might not have been enough, so they changed the prospectus.

      As far as volatility drag is concerned, these days it’s about the same as when it was 2x because VIX is more volatile as VIX is higher. When it goes back to being stable in contango under 12, UVXY is not going to print as much money as it used to do last year. Options premium will be lower, so it might still be possible to achieve the same return on capital.

      Reply
  • March 1, 2018 at 6:34 pm
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    Yea, looks like the VIX futures are in backwardization till July.

    https://www.barchart.com/futures/quotes/VI*0/all-futures

    I wonder how soon normal conditions typically resume? This older blog suggests weeks:

    http://www.cboe.com/blogs/options-hub/2015/08/30/the-history-of-vix-contango-and-backwardation

    This newer one suggests the return of contango usually happens fairly quickly.

    https://www.google.com/amp/s/seekingalpha.com/amp/article/4143873-vix-curve-backwardation

    This all puts me on the fence about whether to liquidate my puts and buy this week’s groceries with their remaining value, or to ride this out.

    I considered that maybe UVXY just wanted to set a lower bar for themselves with the move to a 1.5x objective while maintaining the same strategy as usual. However the abruptness of the move, the disclosure about changing margin and max positions, and the fact they resorted to trading a competitor all point to a fund that’s been backed into a corner. Interestingly, they’re in a bind with their trading ability limited right at the moment they should be making money.

    Reply

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