Closing a volatility short and writing an inverse volatility strangle instead

This post may also be read at www.cboeoptionshub.com/2015/10/19/closing-a-volatility-short-selling-an-inverse-volatility-strangle

Let's check back on the progress of a trade last mentioned two posts ago.  This could be described as one of my favorite games ever, formally called "shorting the ultra-long volatility."  I've dabbled in both TVIX and UVXY recently, and the October 6th post illustrated some meat carved off the bone from the eleven-ish level on TVIX down to $9.48, when I just could not resist taking a bite.  To the tune of $651.

Never one to be happy with a clean plate, I loaded the plate again, as alluded to in that post as such: "jumped back in less than one hour later" ... "and sold some UVXY short at $43.79."  I also mentioned that I might have to sit through some adversity with the position, but I didn't really believe it was likely; I was trying to minimize cockiness and also preemptively save face, in the event I might be wrong.  Six trading days later, I bought the short shares back for $38.59, and it was not necessarily to "call bottom" on a move, but rather, to take a short breather and convert the chips back to TVIX.  Why would I do this?

Well, originally, I got the clean hundred of UVXY short shares with the intent of selling one put against it.  But, due to pathological cheapness, I could not bring myself to do it.  Said another way, I didn't think the premium I'd be able to collect at the time would be worth offsetting the potential gains I'd make with UVXY short shares.  Take a look at the activity during the days I held this to see how difficult it was to pick a plausible UVXY bottom:
 

As you can see, I tried all day on Thursday the 8th, but basically sat back in awe of the ever-dropping share price, each minute happier than the minute before that I had not tried to be a wise guy and set a floor on this rolling boulder.  On the 14th, realizing that if I had not sold a put yet, I would probably never do it, I bought the UVXY shares back and then used most of the proceeds to add to an existing TVIX short position I had started to build up on October 7th, 8th, and 12th right after writing my "Book It While It's Hot" blog entry (because apparently I like cooking more than I like booking, so I secretly started a pot boiling as soon as all of you had left the room.)

This brings us all the way to today, where I closed out the varied and sundry lots of TVIX accumulated recently and took a nice profit, but felt immediately afterward like a person who just ate the last piece of cake.  How does such a person feel?  Wondering where their next piece of cake is going to come from - that's how!  Here's the cake, sliced up:

Now I'm in need of something to do if I'm going to stay out of trouble.  I looked over the SVXY options chains this morning when SVXY was trading at around $63.00.  They looked like this:

Here's what I did:  I sold just one call for SVXY expiring on November 20th, 2015 at the 66 strike for $3.17, and I sold one SVXY put for the same expiration at the 60 strike for $3.60.  I have more than 100 shares of SVXY, which makes this what I call a "strangle sandwich" (a short strangle with shares in the middle) but what the brokerage labels a covered call and a naked put.  Here is what a section of my portfolio looked like soon after initiating these positions:

This post is already long, so I'll save the exact profit/loss calculations for the various outcomes and go into them next time.  But the outcomes will run something like this, assuming that I won't buy back the contracts (and I don't plan to):

Keeping the premium received from both legs or
Having 100 shares of SVXY put to me and keeping the premium from both legs or
Having 100 shares of SVXY called away from me and keeping the premium from both legs.  We will see next time which, if any of these outcomes, is looking particularly likely over the other ones, and calculate what might happen regarding additional share purchases or sales connected to these contracts.  I will also go into my motivation for assembling this simple structure of bookend-like contracts.

Option assignment is not always bad

This post may also be read at: http://www.cboeoptionshub.com/2015/10/13/option-assignment-is-not-always-bad/

If anyone remembers (and even if you don't), back in early September I griped a little about my booked gains/losses for the month of August not showing the premium I received for puts I wrote which were then assigned.  The brokerage incorporates the premium received into the cost basis for the shares upon assignment.  I may not have liked that then, but I sure do like it now.  See illustration below on the transactions and the outcome in my account as of today:

That's the transaction detail showing the $1,165.95 I received for the puts; my gain/loss sheet for the month showed only the notation "OA" (for option assignment) and no dollar amount credited.  Instead, my current holdings show the cost basis being lower than $57.50, as such:

First of all, let's address the missing shares. You can see that I wrote three puts, but there are only 200 shares shown in my portfolio.  I sold 100 shares of SVXY at some point in the interim.  If you want to be detailed about it, well - I sold more than 100 shares from several different basis prices, but let's zoom in on the way the brokerage recorded it (and I was the one who set the LIFO or FIFO, so who really cares, right?) but I did, in fact, sell 100 shares on September 4th for some noble purpose that may not have panned out as profitable, but here is the ugliness, anyway:

So, to recap and refine this story in text format, with the above graphics as visual aids, on August 28th I fell victim to my own put-writing by being assigned 300 shares of SVXY at the contracted price of $57.50.  The brokerage left my gain/loss detail for the month looking unimpressive (even more unimpressive than it already was) by recording the gain/loss as a zero for that transaction and instead logging a nicer price for the shares I was forced to buy.  Instead of $57.50, they were recorded as $53.61 per share to purchase.

Then on September 4th I got the wild idea to take a loss on 100 of those shares to enable some cockamamie scheme (actually it was for the purchase of in-the-money calls - see my blog entries from September 16th and October 3rd - and those calls did end up being sold for a profit.  It looks I got my loss back and tacked $300 on with that venture.)

As of today, the remaining 200 shares of SVXY sit in my account with the price paid noted as 53.61 and the price as of this writing being 60.85 for an unbooked gain of $1,434.61.

The gain I initially realized from the put writing went straight into buying the shares, but an attractive-looking purchase price was recorded.  I lost $743 when selling 100 of those assigned shares, but did make a comparable (plus bonus) profit on a side swindle with the liquidated cash.  And my 200 remaining shares could be sold right now for a $1,434.61 profit.  So being assigned is not always the disaster it is sometimes thought to be.  I used the words "down in the dumps" in September when describing my share holdings, but now I have no complaints.

Book it while it's hot

This post may also be read at: http://www.cboeoptionshub.com/2015/10/06/book-it-while-its-hot/

When we last left off, I wrote in detail about the long calls I bought for SVXY.  I still have those, and the update is that while they traded for only $4.64 each at the time last mentioned (versus my $8.50 buying price), the bid/ask on those has risen to $7.00/$8.30 as of this writing, with the last trade recorded at $7.49.  I keep under consideration the idea (translated: I can't wait) of getting out of these calls as soon as I can do so for even money.  All right; it's not really true that I'm chomping to get out of them. I would have to assess conditions at the time.  My intention is to amplify returns that I would expect to make on a particular number of SVXY shares.  I might make money on neither, though, with the shares simply turning into slimmer versions of their former selves (which allows me to retain some value and some hope for future gain - slim livestock can always fatten up) and the calls turning into dust.  That is the risk I took by buying calls.  I will evaluate the risk every day until I get rid of the menacing things.  I have until January, but dollars and time do not always equate in the way we would like, and I'm not crazy about holding a potentially depreciating asset.  This is the extended-mix way to say I am nervous owning long calls.

I will now revisit a topic too tangential to get into in the last post.  I said, "I did something else with the rest of the proceeds" of some liquidated SVXY shares.  Hmm... I could compare the loss I took on those liquidated shares and see how it lines up with the gain I booked on the following.  But I'm not going to do it, mostly because I bought and sold so many small lots of SVXY during the last several months that it would be meaningless to single out one lot and differentiate it from another.  After all, it is up to me to set "FIFO" (first in, first out) or "LIFO" (last in, first out) when I liquidate shares, and I was not even paying attention to that.  I don't really care whether my booked gains and losses look pretty; I expect them to even out in the end with real dollars and not just beautiful ledger entries.

So anyway, on September 18th and 28th I sold some shares of TVIX short.  See detail.  It was 360 shares altogether for an average entry of about $11.31.  Today I bought all of those back to close the trade at $9.48 for a profit of $651.

A visual representation, showing the start of TVIX down the side of the mountain, is below:

Then, never content to consider a trade done and over with, I jumped back in less than one hour later (grabbing a little bit of benefit from momentary float upward in TVIX/UVXY) and sold some UVXY short at $43.79.  (By "momentary float upward" I mean that I sold UVXY short at a higher comparative-to-TVIX price than the point at which I had exited the TVIX short.) I may have to sit through some adversity on this, as I did with the TVIX trade.   My purpose in this was chiefly to convert my TVIX short to a UVXY short, with the possibility open that I can sell covered puts against this position if an attractive opportunity presents itself.