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Update UVXY

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!

{ 19 comments… add one }
  • Chris B June 13, 2018, 3:32 am

    That will be one ballsy trade – bolder than the long puts. I hope for the sake of all of us it doesn’t blow up!

    You could reduce your margin and eliminate the unlimited risk by adding a cheap OTM long call. A low-vol environment is the right time for such a move.

    As for me, I’m still in a capital preservation mindset. The past few months have shocked me out of my complacency that the Trump administration will simply be about golf, sex scandals, and tweets. Trade wars and other inflationary actions will eventually cause a surprise. I’d almost be more likely to place a bet that a UVXY call would pay off sometime in the next two years, rather than take the opposite position that nothing much will go wrong. I hope I’m wrong.

    • David June 13, 2018, 1:11 pm

      ATM short call + ATM long put + OTM long call = ITM long put with higher commissions.

      I agree it’s a ballsy move. February saw UVXY go up 300% and then took 4 months to go back down. That’s a lot of lost sleep. It could pay off massively though if the next correction isn’t due for a year.

    • The Lizard King June 13, 2018, 5:35 pm

      I am considering taking a small debit to offer some hedging.

  • financialfreedomsloth June 13, 2018, 1:47 pm

    No tax advantage here by selling at a loss. So I’ll keep the position hoping the lower volatility summer months will let me exit this position with less loss (or might one hope: a small profit).

    • The Lizard King June 13, 2018, 5:35 pm

      best of luck with it. Hoping for sustained period of low volatility for all of us.

  • chomper June 13, 2018, 6:35 pm

    It looks like the Fed is going to keep hiking until we get another recession and market crash. I’m convinced now that they will not stop hiking until something breaks.


  • chomper June 13, 2018, 6:59 pm

    So, as I understand it, the Fed needs to hurry up and raise rates so that they can reduce them next year, after they tank the economy… My brain hurts.

    • The Lizard King June 14, 2018, 12:33 am

      We would all be better off if the world’s central banks got out of the monetary manipulation game altogether. Maybe even go back to commodity based money.

      • Chris B June 14, 2018, 4:05 pm

        There’s no way to do so. Governments create money and control its supply, so they’re always expanding or contracting the monetary base no matter what they do.

        • The Lizard King June 14, 2018, 5:24 pm

          As recently as 1971 the US and the world were on the gold standard. The amount of money you could create was limited to how much gold you could accumulate. Inflation has been pretty damaging ever since. Returning to the gold standard would not eliminate the business cycle or the credit cycle (see the work of Knut Wicksell). But it would stop exacerbating natural phenomenon via government meddling.

  • The Spaniard June 14, 2018, 3:31 pm

    Hello everyone!!

    A little piece of advice: never sell a naked call in a a vix related product. Its going to blow your account sooner or later. Sell a call spread instead.

    Thanks for your wonderfull blog.


    • Chris B June 14, 2018, 4:30 pm

      If it will blow up at some point, perhaps a “bet the farm” gamble would be to buy the UVXY calls maturing in 2020 for $4.50 at the $10 strike. Yes, you’ll probably be down 50% or more at some point, but it’s also a decent bet UVXY will hit $20 at some point in the next year and a half.

      • The Spaniard June 15, 2018, 8:47 am

        The main point is when is it going to happen? UVXY could be valued at 4 cents or less by then. However, what I wouldn’t like to live is that moment with a bunch of naked calls. The scene goes something like this: VIX goes up sharply from 9-10 to 70 in a couple of days, all my naked options increase their premiums hugely, at the same time all my closed end funds and stocks fall 50%+ , etc… Margin call. We all know that this black swan events happen from time to time.
        This short vol trade is very profitable in quite markets due to mean reversion of VIX and the contango of its futures in uvxy, but if the thing gets nasty against us and our leveraged portfolio with negative vega and gamma…

        Sorry if my english is not good enough.


        • Chris B June 15, 2018, 1:57 pm

          I agree. February was just a taste of what is possible.

          I think there is an opportunity to go short UVXY and go long the VIX index, capturing the waste of UVXY while hedging against a rapid VIX rise. The difficulty is in beta weighting the two different instruments and maintaining that balance.

          • David June 15, 2018, 2:56 pm

            If you fully hedge your UVXY exposure, you will suffer from decay in the VIX futures position at the same rate of UVXY decay. You’ll also pay hard to borrow fee.

            It would be better to flip it around by being long UVXY and short VIX futures. You would earn the hard to borrow fees as compensation. I don’t think it’s capital efficient though.

          • Chris B June 15, 2018, 4:18 pm

            I was thinking of using options rather than futures. That way you can put UVXY’s wasteful strategy on the bearish side, and the pricing of the index itself on the bullish while neutralizing the effects of time decay. Something like:

            -buy 10 UVXY bear call spreads
            -sell 15 $VIX.X bull put spreads

            I guess you’d call that a correlated-asset short box strategy* (*not found in textbooks!). Unfortunately, the expiration dates are offset by a month, so it’s a tough position to fully understand.

          • The Lizard King June 16, 2018, 2:34 am

            Would you be interested in fully fleshing out this idea? I could include it here as a “guest post”?

  • The Spaniard June 17, 2018, 7:31 am

    But if you sell bullspreads you are only going to cash in, I supose I have not checked it, a little bit of premium with a lot of risk instead of profiting with the big movement you’re waiting for.


  • Chris B June 19, 2018, 7:17 pm

    I set up the trade described above in a paper account for the following prices:

    UVXY Aug 17 2018 bear call spread
    -10 $8 calls @ 3.18/share
    +10 $9 calls @ 2.61/share
    Initial net: +$570 minus commissions

    VIX Aug 22 2018 bull put spread
    +15 $12 puts @ 0.55
    -15 $13 puts @ 1.00
    Initial net: +$675 minus commissions

    I didn’t execute the orders simultaneously, so the combined position started out down about $40. We’ll see how it does.

    I suspect this is a bet that should (a) harvest UVXY’s expense ratio and (b) bet that contango will have a bigger effect on UVXY than backwardization between now and August.

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