Outcome: Net Fun

This post may also be read at: http://www.cboe.com/blogs/options-hub/2017/04/29/outcome-net-fun

Shorting UVXY is sort of like making pancakes and flipping them in the air and catching them with the pan.  You can entertain yourself and others like that for a while, and you just may accumulate a large stack of perfectly browned piping-hot pancakes, but sooner or later some raw batter is going to hit the kitchen floor, and that is not much fun.  And what if everyone eats up all your pancakes in the meantime, and you're stuck with nothing but a kitchen-floor disaster? Well, on Thursday, April 20th, I felt the ever-present hunger for a little short UVXY profit, so I shorted some shares.  But only with the keen awareness that I was lending out borrowed shares backed up by capital I really did not want to cut into and hand over in an "oops - bad timing" debacle.  It could also be likened to writing a check as a security deposit, not wanting that [huge] check to be cashed - because what if the damages might turn out to exceed the amount I have in the bank?  Sky's the limit with UVXY and I wanted to be along for the ride down the slide, but not for anything involving high-and-rising share price heights.

I could not or did not want to watch every tick and possibly experience the sickening sight of a huge and maybe nearly-immediate loss in value of my short shares.  So instead I paid a fee to set a limit on the amount of risk I'd be exposed to and I accepted a time limit within the fee's contract.  My fee was 0.65 per April 21st (the very next day) 19.50 strike call contract and I bought the appropriate number of contracts to go with my short shares.  I had shorted at 19.53, so the plan was:  Should I choose to exercise those calls, I'd be buying shares to cover at 19.50, making a $0.03 per share profit on my short, bring my loss at that point to 0.62, or $62 per block of 100 shares.  The hoped-for scenario at this point, conversely, was that UVXY would drop enough from my shorting price of 19.53 to pay me back for the 0.65 cost, so that I could buy the calls back for some small recoupment or even see them expire worthless, but I'd make so much when closing the short that I'd find the 0.65 to be worth the sleep-at-night value it conferred.

I wanted to reduce that cost, though, by selling some puts, even though that action would then limit the profit I could make on the above-described short with protective call.  I priced out puts tick by tick (see, there's no escaping watching the ticks, but at least I had breathing room now) but didn't like the fact that I'd still be locking in a loss, even though it would be a maximum worst-case loss.  Puts were going for prices lower than what I had paid for the call, so I couldn't pay myself back fully.  To be a hair-splitter, I had a 3-cent head start on the short, so I could accept a price 3 cents lower on the puts and still pay myself back.

It turns out that a series of nice red ticks brought the put prices down to where I was able to sell the same expiration puts on the 19 strike for 0.63 (see first orange arrow on chart), nearly the same as the price I paid for the calls.

At this point I could ignore the whole trade and check in late on Friday to find out whether it was a zero or the full profit or something in between.  Zero would materialize if UVXY would end higher than my call strike.  I'd exercise the calls, buy to cover for a 0.03 profit per share, and I'd have the full put premium received of 0.63 to set against the 0.65 I had paid for the redeemed calls, and you can see that this would come out to completely flat.

Something in between would materialize if UVXY would end between my strikes.  I'd be able to take some profit on the short, and premiums would offset each other (as described above, with the call expiring worthless against the full premium retained on the put).

Maximum profit would occur with UVXY ending below the put strike.  I'd lose all of the 0.65 I spent on calls, I'd be assigned on the puts, keeping the premium of 0.63 received, and at the strike price of 19.00, my short profit would be 0.53 per share.  This would net out to 0.51 per share, or $51 per block of 100 shares.  I was all set, though, with this can't-lose scenario and could sit back and do nothing.

But wouldn't you know I went and tinkered with this, taking vital parts of the machinery apart, early Friday morning.  UVXY opened so high and rose so much higher (see second yellow arrow on chart) that within seven minutes of the market open I bought back the puts to close for 0.20, envisioning a reversal of this hopefully-aberration-like open and then unfettered short share profits beyond my wildest dreams.   It seemed like a good move - for a little while.  Most of my short put premium had been locked up as a booked gain, and nothing was holding me back from limitless profits to the downside on UVXY.  But as UVXY zig-zagged higher for hours, I realized my mistake.  I had gone from max-loss-zero to a max-loss equivalent to the premium I chose to give back in my impetuous buy-to-close.  Should UVXY now rise above my call strike, I'd be able to buy to cover safely and essentially flat, but I'd be out the 0.65 cost of the calls with only the 0.43 profit made on the puts to offset it, or a 0.22 per contract/$22 per block of 100 shares loss.  Prices under my [no longer existent] put strike were looking unlikely by midday, and I kicked myself for turning my can't-lose trade into a might-lose-moderately trade without thinking it through.

I started looking for ways to bring in whatever premium could be recovered from the call side.  I already had a maximum loss set out at this point and while I couldn't likely recreate the no-loss scenario, I could manage the same max-possible-loss by changing the criteria for the day's outcome.  And the outcome loomed close, with only an hour and some minutes left in the day.

At 2:46 PM, I sold the calls for just 0.06 against the 0.65 I had paid.  That doesn't seem worth much, but I used that in determining the price for my stop-on-quote.  In order to break even-ish, I set the stop for my short UVXY shares at 19.33, while they were trading at around 19.12.  Within a few minutes my stop almost hit (see chart below.)  I believe it was within 2 cents, and you can deduce my mental state when I tell you that the person looking over my shoulder suggested that I "go and do something else for a while."

Soon, enough, a cascade of tumbling UVXY prices appeared like Niagara Falls, so - finding myself suddenly at the bottom of the falls - I climbed aboard the first boat I could see through the mist without stopping to read the name first, and grabbed the 18.98 bid to get rid of my short shares and put this story in the history books.  You can see the price bounce that ensued (back over 19.25 for a second), making me glad I hadn't waited and analyzed and computed even one darned digit before hitting "market" to unload that short.  To recap:  My known-max-loss went to no-loss, then to a different known-max-loss, and ended up at a profit not too far from the original max profit I had computed.  With an ultimate cost of 0.59 on the calls, 0.43 profit on the puts, and 0.55 profit on the shares netting out to +0.39 overall, I consider this a two-day adventure I'd be happy to have again, at least after I shake the 2-cents-from-stop experience (better than triggering-stop-in-one-tick) out of my brain and try to remember only the good parts and the fun.

Short some shares and call me in the morning

This may also be read at: http://www.cboe.com/blogs/options-hub/2017/04/21/short-some-shares-and-call-me-in-the-morning

Who wants to buy high and sell low?  Why would anyone buy calls before the closing bell and sell them to someone for half price the next morning when the opening bell rings?  When would anyone feel okay about buying for 88 cents and then selling for 45?  Answer: When the calls are just a wrapper, a box designed to keep something else safe while in transit, like a shoe box protects the merchandise on the delivery truck so that your purchase isn't thrown on the porch one shoe at a time by the people in the step van.  Of course, that shoe box may convey to you an unflattering, ill-fitting pair of shoes you don't like or aren't ultimately able to use, but it may surround and present you with just the thing you were looking for; you may have something valuable in your hands that needed some insuring.

On Wednesday, April 19th just before the close, I decided to take a short position in UVXY.  Because I didn't want to spend a lot of time or put a lot of money at risk waiting to see if this short would produce gains for me, I decided I would limit the losses a wrong-way short might put me in line for and I bought calls at-the-money expiring just two days later.  The shares were shorted at the price of $20.08, and I bought one 20 strike call for Friday's expiration at the option price of 0.88 or $88 for every hundred shares of stock.  At the very worst, if UVXY would rise and never come back down to refuel, I'd be able to exercise my calls on Friday and turn that into a buy-to-cover at the price of 20.00, which would actually net me an 8-cent profit per share.  So it would be an expensive shorting venture, bringing in only $8 per block of 100 shares on the short and paying $88 to make sure I wouldn't have to buy the short back at some damaging, unpleasant or downright scary price which could be any price, really, when you're thinking about UVXY.

So, of course I didn't really want to pay that much, and I had in mind the idea of selling puts at the next strike down, so that I'd have the chance to bring in some profit on the short shares, but I'd also be able to pay myself back for the calls I had just bought.  Problem:  19.50 strike puts were going for prices not high enough to fully pay myself back, so I thought I'd wait until the morning and see if better prices could be found then.  So I kept these short shares with only protective calls to accompany them overnight.

In the morning, UVXY had dropped so sharply that I abandoned the idea of selling puts and instead covered my shares at 19.40 for a 68-cent per share profit, or $68 per block of 100 shares, and then I disposed of the calls by selling them to whoever shelled out 0.45 per contract, and against the 0.88 I had paid, that was 0.43 I recovered or $43 per contract.  Setting my final cost of $45 per contract against the $68 per block of 100 shares I brought in, that ended up being $23 per block of 100 shares on this short, and I was pretty happy with that.  Considering that the trade was opened a few minutes before closing time and in the can a few minutes after opening time, that's not bad for a coffee and ding-ding (closing bell and opening bell) trade.

Rewrap and return to the store

This post may also be read at: http://www.cboe.com/blogs/options-hub/2017/04/20/rewrap-and-return-to-the-store

Before the paint was really dry I started tinkering with the reverse collar set up yesterday.  The first thing I did, acting upon a suspicion (you could call it a wish) that the VIX would sift downward the next day (which is today, as I write this), is that I closed the short put.  To recap the spread, it was as such, all of it opened yesterday, April 18th:

Shares of UVXY sold short at 19.48
Put for the April 21st expiration, 19.00 strike, sold short for 0.62
Call for the April 21st expiration, 19.50 strike, bought for 0.98

Soon after setting this up, I realized that I was taking on a risk of a $38 per contract loss and stood to profit only $12 per contract, at best.  Then it went against me, and then in my favor, and I'm not sure how soon or how many times.  I was too busy calculating exit strategies and the landscape changed several times in between checking in on it.

Late in the day I decided I would buy back the put at a loss.  I would have been able to do so for a gain, just minutes earlier, but as I watched and schemed it turned into a loss, and I did it anyway.  Why?  I decided to raise my risk so that I could raise my potential reward.  As it stood, my risk was limited to a total of $380, but removing the short puts from the strategy would change that risk to the total of the loss I might realize on the shares (just two cents per share) and the premium paid for the calls, which was 0.98 plus any loss taken on the closing of the short puts.  I closed the puts for 0.79, after having opened them for 0.62, booking a loss of 0.18 or $18 per contract.  My total maximum worst-case loss would now be 1.18 or $118 per contract.

Then this morning, I saw that I was fortunate enough not to be looking at potential losses; instead I caught a glimpse of some nice unbooked gains.  As seen in the chart, UVXY was well into the 18s.  I saw that I could close both my shares and my calls and take a profit of about $40 per contract, but being greedy, I calculated stops to set instead.  So I did the following:  Sold the calls which I had purchased for 0.98 to someone willing to pay 0.27, which increased my total loss (adding in the put loss from yesterday) to $89 per contract.  My goal now was to close my UVXY short shares at any price that would pay me back for that loss, or better.

Remember that I had shorted UVXY at 19.48, and it was now trading in the 18.20s.  The yellow line indicates a stop I set to buy to cover at 18.56.   This was intended to net me a $92 (per block of 100 shares) profit so I could wrap all this up and put it behind me in the learning books.

 Then, as often happens, one spike, and I mean ONE one-minute candle (see above) conspired to take out my stop and I lost the whole deal.  My UVXY short shares were now bought back at 18.58 (you should have heard the series of ring-a-dings as attempts were made to get me out as requested) and my profit on the short shares came in a 0.90 per share, or $90.00 per block of 100 shares.   So I ended up essentially flat on this venture, which is better than the way it could have ended.  That sure was a lot of fancy footwork to close out such a multi-faceted gem that was intended to run as long as three days and could have produced a range of outcomes, only to back out within one day and wipe the slate clean.

Taking the unmarked trail

This post may also be read at: http://www.cboe.com/blogs/options-hub/2017/04/19/taking-the-unmarked-trail

Every once in a while I have to try something new, and that means choosing something different from the menu and forgoing that same old tried-and-true sandwich.  What sandwich am I talking about?  My own trademarked "strangle sandwich," which is no one's favorite but my own.  It's a doozy; it's not for all tastes, and it might just fail and make you sick (and sorry you tried it.)  Let me tell you what it is before I tell you what I opted for instead, today:

I like premium, so I can't resist the appeal of the classic short strangle.  But who wants to lose on any spread?  This is how I have managed certain strangles in the past (and by "certain," I mean those that appeared they were going to lose me money.  I don't open them to lose money. Does anyone?)  Going short some puts and short some calls is simple, beautiful, and graceful because the option prices decline daily, your premium becomes "safe" from grabbing hands, and your account goes greener with every tick until expiration - if things go your way.  That's the dream scenario:  That your underlying goes to sleep and doesn't budge from its park bench while call buyers are crying and put buyers are fuming and their money becomes yours, more and more till the clock runs out.

But somewhere there in the middle, the middle might not stay in the middle and you might see your strikes in danger of being breached.  As the strangle seller, I have done the following:  Bought the stock as the call strike loomed near, with the intention that those shares get called away.  What a beautiful solution, right?  You still get the full premium received from both legs, and you get a bonus in the form of stock bought and then sold at a profit, as the calls are exercised.  Now, let's not get into whether I've practiced this, exactly.  I've done it, but then closed the calls way up there in the loft, and what do you think then happened to my shares?  I got out of that scrape, still for a profit, but not quite as much as I would have, had I followed the described plan.  If you try to get fancy, you have to realize you're getting chancy as well.  But back on topic:

  The same thing works on the downside, as well:  You can short shares if you believe the lower strike will blow through. Have I done this?  I don't think so.  But I would, if the need arose.  What I am describing is transforming your naked calls or puts into covered calls or covered puts. Is this a fail-proof plan?  Is anything?  Well, this isn't, since you can take on the long or short shares, only to see them go the other way.  I've done this (making my short strangle into naked puts and covered calls) so few times that I can say I specifically remember it and it worked well when I did it.  But could I count on that?  Of course not.
 

Let's move on to the next thing on the menu I have become willing to try.  I love shorting volatility, and I need to leave a lot of unused cash to cushion that.  No position is a good one if it leaves you vulnerable to being wiped out.  So I have to be responsible and leave oceans of unused dollars serving as collateral to my short-scheming ways.  Could you blame a coyote for licking his chops, looking at all the dollars just sitting there doing nothing?  How about breaking out the cookbook (or at least the Acme catalog) and planning something new?

What to do when you'd really like to take a short position but don't want to risk being wiped out, or even if you'd just like to cap the loss you might realize?  Is it worthwhile to pay to cap that loss?  One way to do this is to simply buy calls when taking out short shares.  Today I shorted UVXY at 19.48 and bought one 19.50 strike call contract to go with each block of 100 short shares.  Now, I don't like to take losses (note the .02 difference between my shorting price and the call contract strike) and I don't like to pay for anything, so this wasn't a move I made while smirking and high-fiving myself.  In fact, I had to hold down the nausea from paying 0.98 per contract for this dubious privilege.  And I'm pretty sure I didn't construct this in nearly the best possible manner, so don't take this narration as instruction from me.  Take it as the "cry along with me" tale of how I possibly (not sure yet) messed up, but darn tootin tried, anyway.  To recap, I shorted at 19.48, which is $1,958 per block of 100 shares, and paid 0.98 per contract which is $98 to insure each 100-share block from rising to infinity or even some moderately high price and closing down my whole account in three days.  The idea is that if my short should fail, I could exercise my call and cover my short for just two cents higher than I opened it (or $2 per block of 100 shares), and I'd be out $98 per contract as well.  Not bad, I guess, and that could have been left as is.

But wait!  The story's not over.  I did bring in some salve for the burn:  .62 per contract received from selling puts at the 19.00 strike.  So there's $62 brought in per contract, and should UVXY rise (or even stay above 19) instead of fall, I can set $62 against my costs as detailed in the paragraph above.  So it looks like the worst that will happen to me is that I'll lose the $98 and the $2 and gain $62 and that comes out to booking a $38 loss per contract.  That would happen if $UVXY ends anywhere above my upper strike of 19.50.

Now, there's filling in the middle of this sandwich just as there is with the previously described strangle sandwich, although the filling isn't as delicious.  In this case it would be various degrees of disgusting (since I consider all losses unpalatable) as I might end up selling the calls for some puny price (if I hurry up and do it before they burn up at expiration) and booking an even punier gain on my short shares.  But then again, I did bring in some premium on my short puts, and I keep the full profit on that at every UVXY price over 19.00, so there's some ketchup to disguise the bad taste.  Let's take a theoretical ending price of 19.25 for UVXY on expiration day (Friday, April 21st) and compute it.  (I'm excluding commissions for ease of computation.)  The calls would expire worthless, so there's $98 gone bye-bye. The short 19.00 strike puts would expire worthless to the buyer and my entire received amount of $62 per contract would be retained by me to set against the $98 loss.  So far we're at a $36 loss per contract. I'd close my short shares for 0.23 gain per share, and per block of 100 shares that would be $23 gain. I'd be THAT close to being ahead, but would actually be $13 down, for the trouble of watching this drama unfold and end right near the bulls-eye.

If the bottom strike (the put) is breached, I'd have to buy it back to close (assuming I don't get assigned early and that I want to avoid being assigned at expiration), but of course, the more I have to pay for that, the more my short shares would be working to hand me the money needed to do that, dollar for dollar.  (Alternatively, as just mentioned, if I'm assigned long shares I could just close the position while setting the short shares against them.)  The maximum gain to me on this reverse collar would be UVXY ending lower than the put strike price of 19.00, which is the point below which I'd have to start paying something to buy the put back.  I'd make 0.48 per short share at that price and more, accordingly, at lower prices (although I'd have to spend the gain from those lower prices to defray the put-closing costs), so that after paying to close the short puts, I'd net $48 per block of 100 shares, with the long calls being lost money.  So at the worst case, I'd lose the $98 spent on calls, I'd make enough return on the short shares to offset any costs incurred in closing the short puts, so my maximum profit would be exactly as follows: The short put premium collected of $62 minus the long call premium paid of $98 plus gain made on the short shares which is capped at 48 cents per share because if UVXY ends under 19.00, any extra profit seen on those shares will be needed to pay to buy back the short puts, for a grand maximum total of $12.

I see what I could have done better.  I should have made sure the put premium received was higher, to make the risk on the top side worth my while.  In fact, a rule of thumb would be that the width between my shorting price and the put strike price, plus the premium on the short puts, should stand up against the price of the calls combined with any loss I'd take upon exercising those calls by an amount that I consider worthwhile, as compared to what I'd stand to lose, should the desired direction for the security (in this case, down for UVXY) not materialize as I wish it would.

Of course, there are various methods by which this can be closed out without waiting until the dealer gives out prizes when the hands are turned in.  I could close out any segment of this trade anytime, and reopen (or not!  See third paragraph.)  Follow UVXY this week and check back to see how I close out this clumsily-constructed first try at a reverse collar.