I closed my UVXY long puts.
music selection: “Rock And Roll” — Led Zeppelin
My UVXY puts have been deeply underwater since the issuer made the decision to reduce the leverage of the underlying from 2.0 to 1.5x. I had a loose plan to hold until the strike was at the money but have been entering unlikely to be filled limit orders in hopes of getting a favorable fill. Today, I sold UVXY200117P00006000 for 2.59.
Since the puts were purchased at 4.35, the 76 contracts yield a 13,376 short term capital loss. I’ll be sitting out the trade for 30 days to avoid the wash sale rule. I don’t want to lose a 13 thousand tax benefit! I’ll be letting my 7.5% notional direct short in VXX decay to zero and no longer topping it up. Instead, I’ll target 5% notional short in UVXY playing it as a synthetic short. That will give the same look through exposure but without the monthly drag of hard to borrow fees that are coming in around 100 a month right now.
A synthetic short should be immune to any future changes to the leverage rate. I don’t want to make that mistake again. Importantly, by playing both ends against the middle, the volatility premium at any given time should become mostly a non-factor. Before, when buy just a long put, there was a penalty to entering the trade during high VIX environments. Now all that matters is the nominal price of UVXY, which should reliably decay over long periods of time.
I was going with 10% exposure to long puts. With a naked call as part of my strategy, I will be utilizing some margin. Thus, I am scaling back the size of the trade. At 5%, I will be using 7.5% margin (my broker will calculate the 1.5x leverage of the underlying as a margin consideration.) In the event of a short term doubling of price, I will thus be at 15% look through exposure. I can tolerate that.
Finally, I will stop topping up the trade if the 2 year treasury yield exceeds the 10 year yield. I will close the position completely if the 90 day yield exceeds the 10 year and probably open a short in SPY. This lizard is watching the yield curve with great interest.
Devour your prey raptors!