I have bought some UVXY LEAP puts in my tIRA account.

music selection:  “Tennessee Whiskey” — Chris Stapleton – That’s right, A country song!

I don’t ordinarily cover the trading action in my tax advantaged account but the UVXY trade is so popular, I thought I’d make an exception and share.  I found myself with some undeployed cash and decided that UVXY puts were the best risk/reward on offer in the market right now.

I bought UVXY180119P00016000 for 8.40 a share.  I’ll be holding the position at least 30 days unless it moves into the money unexpectedly quickly.

Devour your prey raptors!

Update UVXY Puts

Never miss another opportunity to devour prey!

7 thoughts on “Update UVXY Puts

  • July 29, 2016 at 9:50 pm
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    I’ll admit that I haven’t really followed the UVXY trade but I am interested in learning a little about it. With the VIX being about as low as it ever gets doesn’t that make for bad timing for buying the UVXY leap puts ?

    Do you have some approximation/model of what % you would expect UVXY to decay to after N days that you use to decide what’s a reasonable strike and price to pay for the puts ?

    Reply
    • July 29, 2016 at 10:48 pm
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      UVXY by it’s very nature has to buy expensive futures until they become cheap and then buy more expensive futures. So BY DESIGN it goes to zero and has to reverse split every year like it just did. This is not a flaw, it’s not a “scam”, it’s how it’s designed.

      Reply
    • July 29, 2016 at 11:30 pm
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      Pacer,

      I like to buy when the VIX is low as the pricing for the options is lower. You are being more contrarian if you wait for spike in volatility but then you pay dearly for the options. So you end up holding the position for about the same time either way. I like to just let the bid/ask spread tell me what a fair price is (roughly) today. The time decay is difficult to estimate because it is not linear. I do know that you want the longest dated LEAP available as the trade can easily go against you over short time frames.

      Reply
  • August 1, 2016 at 3:50 pm
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    Hi Lizard King

    I’ve made quite a bit of money doing this trade, and even just shorting UVXY outright in contango. Clearly, it cannot be this “easy” if it is widely known the product has to buy V1 and Sell V2. Am I missing something here? Why isn’t everyone doing this? Who is taking the long side of my trades? Markets are not stupid, we must be compensated justly for some massive tail risk surely.

    Thank You

    Reply
    • August 1, 2016 at 4:09 pm
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      JW,
      I don’t recommend shorting the underlying. The borrow rate can be high and shares to borrow get scarce during volatility spikes. You can get forced out of the trade at a loss. I had some of the same questions via email with “Andrew”. What I told him was:
      “As to why there aren’t more people in the trade, I speculate:

      1) Options trading just isn’t that popular. It scares people and the fear factor causes people to prefer going long the underlying shares on inverse products like XIV.

      2) Conventional options traders have a very short term mindset. They just don’t play in the LEAP space. That is strictly for hedging in their opinion.

      3) Conventional options traders see the “vega” on UVXY and think, ‘no freaking way’. That is, the volatility on vol is quite high. Making the LEAP puts quite pricey. In the unlikely event you are the type of options trader that has experience buying LEAP puts, the trade smells bad at the price point.”

      As far as your counterparty, in an options trade it is almost always going to be a market maker (sometimes a hedge fund acting as same). The MM does their trades fully hedged with the underlying and is more interested in scalping a few cents of arbitrage out of the combined trade than the validity of the underlying trade. They are market neutral at all times. So the real reason it is “easy” is you actually got “taken” for a couple cents on the trade by a fast moving counterparty with more market information than you have access to. They are thinking very short term (today) while you are thinking longer time. I think of it as ‘time arbitrage’.

      It could be that we are all missing something. That is why I like long puts. My downside risk is defined. With direct shorts, synthetic shorts, and short naked calls, your downside is unlimited. Very risky. Best to keep yourself protected against a black swan event.

      Reply
      • August 1, 2016 at 4:31 pm
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        Hey Lizard

        Thanks for the very detailed and quick response. Are you saying during a market downturn, IB will auto-liquidate my net short positions forced out of the trade because everyone is selling hence hard to borrow?

        I was just thinking before writing the comment another reason may be that this isn’t something institutions would touch. The short availability is approx 42M on IB, hardly enough for institutions to notice. I trade more of a synthetic call when shorting outright, usually shorting an ATM+1 or ATM+2 along with my short shares to capture extra Vol Risk Premium.

        3) How are you making strike selection on the LEAPS? delta based? Price based?

        Thanks again!

        Reply
        • August 1, 2016 at 5:38 pm
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          JW,

          I used to short the underlying and got stepped out twice by IB when they couldn’t find shares to borrow overnight during a price spike. It just doesn’t work. The naked calls on your synthetic eat up a lot of margin and can get out of hand fast during a price spike. I tried writing naked calls in the past, did pretty well for awhile, and then lost all my gains plus some when the Greek crisis first hit. Long puts define your risk while retaining unlimited upside. Short calls define your maximum profit while retaining unlimited downside.

          I like to pick a LEAP strike that is about 30% out of the money. That is based entirely on trial and error. It ‘works for me’.

          Reply

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