Yesterday, January 4th, in order to start out the new year with some degree of nail-biting (figuratively) drama, I hatched a little plan involving some short shares of UVXY. The first thing I did was to buy to close 400 shares, reducing the 1,800 I had opened the previous day to 1,400 in quantity. My plan was to re-short those 400 shares later in the day or on some upcoming day, along with 200 more which I envisioned as a day trade.
Then, thinking about the 1,400 short shares I still held, plus the 600 more I planned to acquire soon enough, I looked at premium for puts on the 6.50 strike of the same security. As you can see from the graphic below, UVXY was trading in the $7 neighborhood when I sold 20 puts for the $6.50 strike and the January 13th expiration.
Of course, I was putting the cart partially before the horse, since I hadn't yet made another short sale of shares, so only 14 of these contracts were considered "covered puts" and 6 were plain old stark naked.
See chart below for the timeline of my trading so far this year.
Here is expanded detail of the put trade. This chart tracks the exact contract. Last week, trading price was just a few pennies. This week, prices exceeded twenty cents. My price received was eighteen cents.
Several courses of action are available to me at this point, particularly regarding the short puts. I could keep them and hope they expire worthless on January 13th. This would require UVXY to close above $6.50 on that day. I could trade my way out of the puts, by buying them to close and making a profit, breaking even, or taking a loss. I could leave six of the contracts naked, or I could short more UVXY shares to make some or all of the contracts covered. Of course, I could buy back any number of my existing short shares to make any number (including all ) of my contracts uncovered.
Will UVXY change in price today or in an upcoming day such that I'll feel motivated to close my short puts? Will it appear safe to leave those puts open through expiration? Since I received eighteen cents in premium, UVXY could close as low as $6.32 (that's $0.18 lower than the strike of the contract) on expiration day and I'd be able to realize no loss upon covering the short shares just before expiration.
Will UVXY rise enough that I'll decide to re-short the shares I recently closed, and will I want to short even more shares? Or will it rise so much that I'll want to keep watching it for a higher entry point? Will it continue to sink, yet I'll decide to short more UVXY shares anyway? Or will I close all of them? These are all questions that will be answered in my next blog entry, as the near future unfolds. If you've read this far, you must be following along, and if you've been doing that, I'm glad!
Hi Meredith,
ReplyDeleteI am following your trades for a while and since I began reading your posts here and at CBOE. I am a pure volatility trader through VXX, XIV (or SVXY to include options). I do not trade anything else!
I was wondering why are you shorting shares + shorting puts instead of selling a call. For the latter, the buying power is lower and less instruments mean less commissions.
Could you explain a bit your strategy?
Thanks in advance,
Pedro
Hi Pedro, thanks for reading! The only reason I don't want to sell calls is that I don't want to be stuck in a time frame. However, calls can always be rolled. It's something to think about. I'm glad you asked because I'd like to review that idea and make sure I'm not missing out on anything. At one point I sold too many calls and got burned, but that was my own fault for not thinking carefully about the outcome. I'm going to look into that further, because I'm always trying to make sure I am not overlooking the best opportunity to manage risk and make a little money at the same time. I know that's not a great answer, but I'll think on it. Thanks again!
ReplyDeleteThanks for your prompt answer, Meredith. Indeed regarding rolling. I understand your point on the timeframe, but I am always scared to short long volatility ETFs. That's why you have big drawdowns on your account. Think about selling calls of short volatility ETFs when volatility is at current levels (low). I can tell you that I sold SVXY OTM calls today. At this level of volatility it is worthy. SVXY will only apreciate by high contango levels (above 13% todays' close). If it approaches my strikes I will continue to roll for next period with a credit... until there is a volatility spike and SVXY tumbles!
ReplyDeleteLike you I am more confident selling volatility (option writing or being theta positive). Also, for me, keeping trading simple and low cost is a must as I trade lower lots than you.
So, please think about not being exposed to volatility spikes and get burned on shorting UVXY. At current levels of vol it is safer to short SVXY calls than UVXY!
Let's keep in touch. I will continue reading yhour posts
I will go over this in more detail this weekend and do some serious thinking (That's when I say I'm in the "VIX lab," - ha ha.) I used to trade SVXY more than I do now, and I mainly sold puts. I will look into the call aspect. Before I get into this further, would you clarify what you mean by drawdowns? I haven't taken any big losses for a long time, but I do withdraw a huge amount from my account, but that's just cash withdrawn because I need it for other things. If you mean simply a change in account value, I am used to that and my goal is to weather it. I do realize there are circumstances that make that challenging, and I realize the risk needs to be watched constantly.
DeleteI'll get back to some of these thoughts over the weekend. Thanks!
Hope your retreat on VIX Lab worked! Regarding drawdowns I am referring to the graph on your Dec, 1st post where you compare your account with S&P. I saw that there are in July and November big drops, but after a recovery. Maybe these are thw withdrawings that you refer. But there are no free launches!
ReplyDeleteNo free launches I meant higher returns would have higher volatility?
ReplyDeleteNo free launches I meant higher returns would have higher volatility! (Instead of ?)
ReplyDeleteYou are very correct; the valleys in my account performance represented times when I held short volatility and volatility rose and hit my account value hard. Those valleys don't represent withdrawals; that chart is supposed to account for withdrawals and deposits and calculate return of investments irrespective of those.
ReplyDelete