I’ve been out of the contango trade since UVXY blew up on me and left me holding the bag on puts with greatly diminished worth due to the leverage change from 2.0x to 1.5x.

music selection:  “On The Wings Of Love” — Jeffrey Osborne

I’ve been doing some paper trading and I feel like the long dated at the money puts are the best way to trade VXX.  It does the same thing as UVXY but without the leverage that resulted in my getting burned last time.  I’ll be allocating 10% of my tIRA account going forward to long dated VXX puts.

As a reminder for those of you have forgotten this thesis or are new to the contango trade, VXX has a fatal flaw.  It is doomed to lose, on average, around 60% of its net asset value per year.  The ticker attempts to track the ^VIX by using a basket of futures.  It uses a mix of 14 and 40 day options and rolls the position daily.  The nature of futures markets is to be in “Contango”.  That is the longer dated futures will ordinarily be more expensive (more time value) than shorter dated ones.  This results in almost every day the fund being forced to sell a “cheap” asset for proceeds to buy an “expensive” one.  Almost every day, the fund bleeds value.

On a split adjusted basis, the stock started at over 441 dollars per share and about 5 years later is worth a mere 13.43 per share.  From time to time, expectations can trump contango and the roll can be a profitable trade for VXX (this is known as “backwardation”.)  But most of the time, the price will steadily fall.  I do have a conventional short open on VXX and it has treated me well.  I don’t want to increase that position for two reasons.  One is shares sometimes become hard to borrow in market dust ups and you can be forced to close your short at the worst possible time.  The other is that the shares can sometimes be expensive to borrow, cutting into profits.  Buying the long dated puts allows me capture the near certain decay in a leveraged way that is cost certain.

This is the trade (well technically UVXY, but in principle the contango trade) that is primarily responsible for me being able to retire early.  I’m going back to it and hope to improve my financial position greatly over the year with it.  I do want to caution any hungry Lizards out there that are getting big eyes, that there is a non-zero chance of this trade going to zero, e.g. a 100% loss.  For this reason, I will warn you not to put more than 10% of your capital into this idea.

I bought VXX220121P00013000 for 5.25 per share.  You want a lot of time value as the ticker is volatile but reliable over long periods of time.  There is a longer dated option available but the liquidity turned out to be very low and the asking price irrationally high compared to the January 2022 puts.  I have 732 days of near certain decay to bring me a profit.  I’ll be closing the position and rolling it every 10 to 15% decline in share price.  Assuming a linear decay, that is about 9 rolls per year at 10% per roll.  This will earn far more profit than holding for 60% decline.  I may cover the math on that in a later post.

I have high hopes for this trade and am excited to get back to my roots for a portion of my investing.

Devour your prey raptors!

Getting back into the contango trade with VXX puts

Never miss another opportunity to devour prey!

6 thoughts on “Getting back into the contango trade with VXX puts

  • January 22, 2020 at 7:54 pm

    I’m nervous about this one, particularly because you’re entering at VIX < 13. It’s unlikely VIX will stay this low for a year, or so, or pull off a repeat of 2017. So you’ll receive little help from price action. I might have waited for a bump above 16.

    I took the entire VIX daily data and found that historically when VIX is under 13, it goes to 16 or higher within 60 days 68% of the time. Today is day 13. Will the decay of VXX occur faster than the bump that will come from a pop in the VIX?

    IDK, but I have noticed the option greeks posted for VIX are useless and the movement of option prices is a lot slower than one might expect.

    • January 24, 2020 at 4:03 pm

      The thesis is time in the trade beats timing the trade. That’s why I bought the JAN 2022 puts. It’s a sure bet the underlying will be 60-90% lower by then. I might have “dead money” for a period but it will eventually be a win.

  • January 25, 2020 at 6:36 pm

    Is the reason you’re going VXX rather than UVXY just to avoid the leverage and the chance of it blowing up on you again? What is the math on VXX vs UVXY (or, for that matter, vs the old UVXY when it was 2x leverage?) in terms of contango?

    • January 26, 2020 at 3:49 pm

      Yes, avoiding another change in leverage.

      VXX falls about 60% a year and UVXY fell about 90% a year with old leverage (average). So new UVXY will be between 60-90% annually. The UVXY puts are going to be more expensive because of the leverage so that negates part of the advantage of the leverage. VXX should still produce close to 100% annualized returns (average) with frequent rolling.

  • February 2, 2020 at 12:39 pm

    What I do is expecting until a backwardation scenario occurs between different ViX futures expirations (normally at sessions with >1% drop), then open a spread between expirations and wait some weeks until 0.5 points of contango are reached.
    This is used to happen tenths of times a year.


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