Author Topic: Fun with VIX options  (Read 38781 times)

spud1987

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Fun with VIX options
« on: September 21, 2017, 01:40:41 PM »
VIX measures stock market volatility. It goes up when volatility goes up. Right now it is near an all time low (around $8-9) since the stock market has been steady and calm. When volatility rises, it spikes sharply. For example, in October '08 it hit $89.

I recently purchased some out of the money call options with a Feb. 2018 expiration at $20. This cost me $1.50 per option. If the VIX is less than $20 in Feb. 2018 I lose all my money. If VIX is $35 in February, I 10X my money.

Only a $2k investment (less than .2% of my NW), but I view this as insurance against a market downturn. Nearly all my money is in Vanguard index funds (60/40 stock/bond split), but sometimes I make some small speculative bets to try and hit it big.

NoStacheOhio

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Re: Fun with VIX options
« Reply #1 on: September 22, 2017, 06:18:04 AM »

Only a $2k investment (less than .2% of my NW), but I view this as insurance against a market downturn. Nearly all my money is in Vanguard index funds (60/40 stock/bond split), but sometimes I make some small speculative bets to try and hit it big.

Insurance and speculation are two totally different things.

talltexan

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Re: Fun with VIX options
« Reply #2 on: September 22, 2017, 07:43:42 AM »
If $2,000 is less than 0.2% of your net worth, then you're a millionaire. Congratulations!

Based on your username, you're quite a young one, too. I've started reading ANTIFRAGILITY, and been considering the value of learning to make some small high-upside bets. Typically, skewness is quite expensive. For example, the typical lottery ticket has an expected payoff in excess of -40%. Identifying high-skewness wagers that do not carry a substantial penalty in mean is the trick.

BTDretire

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Re: Fun with VIX options
« Reply #3 on: September 22, 2017, 09:05:15 AM »
VIX measures stock market volatility. It goes up when volatility goes up. Right now it is near an all time low (around $8-9) since the stock market has been steady and calm. When volatility rises, it spikes sharply. For example, in October '08 it hit $89.

I recently purchased some out of the money call options with a Feb. 2018 expiration at $20. This cost me $1.50 per option. If the VIX is less than $20 in Feb. 2018 I lose all my money. If VIX is $35 in February, I 10X my money.

Only a $2k investment (less than .2% of my NW), but I view this as insurance against a market downturn. Nearly all my money is in Vanguard index funds (60/40 stock/bond split), but sometimes I make some small speculative bets to try and hit it big.
So you have about about 1300 options? Is each option 100 shares?
Just trying to get some idea how it works, I've wondered about a way to hedge a bit.

trollwithamustache

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Re: Fun with VIX options
« Reply #4 on: September 22, 2017, 09:20:40 AM »
Is the intent to do this on an ongoing basis? The long vix trade has failed to perform for a while now.... so how many time periods will you have to keep re-upping and will your big payout actually justify it?

Personally I only trade options I can price better than the pros can. And that sure as hell isn't index options.

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #5 on: September 22, 2017, 10:07:37 AM »
There is a better way to play the ^VIX mania.  For about 7 years now I have made over 30% annualized on a repeatable trade.  What you want to do is use options to short UVXY.  That is a double leveraged ETN that (badly) tracks movements in ^VIX.  The way the fund is constructed is they buy the 14 and 40 day futures and roll them daily.  Contango in the futures market causes them to (85% of the time or better) sell a "cheap" asset to buy an "expensive" one.  This results in a predictable long term decay that is currently averaging around 87% a year.  Reviewing the price history on Yahoo!, I have been unable to find any 12 month period where the note was up in price (it isn't even close). 

LEAP options are available and I have never lost money by buying long dated put options and holding on while waiting for decay to work its magic.  I currently hold the 18JAN2019 expiry 20 puts.  I purchased them on 12SEP2017 for 11.57 a share (1,157 per contract).  Ten days later the bid/ask split is 12.35, suggesting a 246.07% annualized return.  I have a good till canceled limit order to jump off at 12.55. 

I have completed this trade dozens of times over the last 7 years (well sort of, I started with an unleveraged version of this fund) and have been known to book profits as high as 500% annualized.  The worst I have ever done is 16% annualized.  I document every one of these trades now on my blog.  It is my highest conviction idea and was hugely important to allowing me to FIRE on 5OCT2012 at the age of 40. 

Your current trade carries a significant risk of a 100% loss.  You can stack the odds in your favor by buying long dated puts, especially deep in the money if you want to reduce risk. 

ChpBstrd

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Re: Fun with VIX options
« Reply #6 on: September 22, 2017, 11:59:49 AM »
^ I've considered doing a spread going long VIX and short UVXY just to capture the waste inherent in the ETF's business model. I wonder if that could be done in a way that hedges against spikes in VIX while still capturing double-digit returns independent of whatever's going on in the market. It seems like as close to a risk-free trade as I can imagine, but I lack the expertise/software to execute it. E.g. how to calculate the covariance and trade the right number of options so that your overall position is VIX neutral but also short UVXY?

alexpkeaton

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Re: Fun with VIX options
« Reply #7 on: September 22, 2017, 08:46:31 PM »
So you have about about 1300 options? Is each option 100 shares?

Since the VIX isn't a company or even a collection of companies, I don't believe they're really shares. It's just cash.

This strategy, while with great potential upside, is basically a loser over time. My VIX strategy is to wait for the next crash, and short the VIX when it's high. It will inevitably fall. Timing the gradual fall of the VIX is much easier than timing a spike.

If you'd just like to make steady income, you can short the VIX and just roll your options forward every month. Or just buy SVXY.

frugledoc

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Re: Fun with VIX options
« Reply #8 on: September 23, 2017, 01:12:03 AM »
It's an interesting aspect of behavioural finance.

I also find that the more money I have, the more I am tempted to speculate.

When you work hard for your cash and you see people becoming rich from the latest craze like bitcoin it is hard not to jump in, afterall, what does a few thousand bucks matter?

The problem is that you will need to lose a lot of these speculative bets for every one that comes good.

If your first bet or two come good, then the temptation will be to double down, and so on.

It's basically gambling vs investing. 

BTDretire

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Re: Fun with VIX options
« Reply #9 on: September 23, 2017, 05:47:26 AM »
So you have about about 1300 options? Is each option 100 shares?

Since the VIX isn't a company or even a collection of companies, I don't believe they're really shares. It's just cash.

This strategy, while with great potential upside, is basically a loser over time. My VIX strategy is to wait for the next crash, and short the VIX when it's high. It will inevitably fall. Timing the gradual fall of the VIX is much easier than timing a spike.

If you'd just like to make steady income, you can short the VIX and just roll your options forward every month. Or just buy SVXY.
The most positive thing I can see is, the VIX is as low as it has been in the last 10 years.
And the market is as high as it has ever been.
What can anyone glean fron this chart of the VIX and VTSAX.
  EdIt:  Looks Like you need to click on it to see the detail.

hgjjgkj

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Re: Fun with VIX options
« Reply #10 on: September 24, 2017, 11:24:28 AM »
There is a better way to play the ^VIX mania.  For about 7 years now I have made over 30% annualized on a repeatable trade.  What you want to do is use options to short UVXY.  That is a double leveraged ETN that (badly) tracks movements in ^VIX.  The way the fund is constructed is they buy the 14 and 40 day futures and roll them daily.  Contango in the futures market causes them to (85% of the time or better) sell a "cheap" asset to buy an "expensive" one.  This results in a predictable long term decay that is currently averaging around 87% a year.  Reviewing the price history on Yahoo!, I have been unable to find any 12 month period where the note was up in price (it isn't even close). 

LEAP options are available and I have never lost money by buying long dated put options and holding on while waiting for decay to work its magic.  I currently hold the 18JAN2019 expiry 20 puts.  I purchased them on 12SEP2017 for 11.57 a share (1,157 per contract).  Ten days later the bid/ask split is 12.35, suggesting a 246.07% annualized return.  I have a good till canceled limit order to jump off at 12.55. 

I have completed this trade dozens of times over the last 7 years (well sort of, I started with an unleveraged version of this fund) and have been known to book profits as high as 500% annualized.  The worst I have ever done is 16% annualized.  I document every one of these trades now on my blog.  It is my highest conviction idea and was hugely important to allowing me to FIRE on 5OCT2012 at the age of 40. 

Your current trade carries a significant risk of a 100% loss.  You can stack the odds in your favor by buying long dated puts, especially deep in the money if you want to reduce risk.

I went and checked out the options chain for UVXY. Can ou explain a bit about what is going on. It looks like your contract is trading at a much higher rate than contracts with strikes close to it. Why? Separately, how do you decide when it is best to enter the trade? I assume you avoid times around reverse splits, but anything else? Very fascinating and thanks for sharing. Link to the chain https://finance.yahoo.com/quote/UVXY/options?p=UVXY&date=1547769600

ChpBstrd

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Re: Fun with VIX options
« Reply #11 on: September 24, 2017, 06:25:11 PM »
It's an interesting aspect of behavioural finance.

I also find that the more money I have, the more I am tempted to speculate.

When you work hard for your cash and you see people becoming rich from the latest craze like bitcoin it is hard not to jump in, afterall, what does a few thousand bucks matter?

The problem is that you will need to lose a lot of these speculative bets for every one that comes good.

If your first bet or two come good, then the temptation will be to double down, and so on.

It's basically gambling vs investing.

It seems inevitable that entrepreneurs will continually invent new speculative instruments like bitcoin, given the high demand for get-rich-quick opportunities. It also seems inevitable that markets will be flooded with such offerings, as the cost to develop something without value is usually low. This means that a strategy of buying lottery tickets will usually fail due to the longshot odds that a speculation tool turns out to be useful.

Finally, it seems inevitable that the most successful speculative opportunities will be the ones whose future potential is most vague. A narrative for how the investment could take off has to be just right in terms of specificity vs vague answers. The uncertainty makes it seem like a reasonable gamble.

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #12 on: September 24, 2017, 06:58:40 PM »
There is a better way to play the ^VIX mania.  For about 7 years now I have made over 30% annualized on a repeatable trade.  What you want to do is use options to short UVXY.  That is a double leveraged ETN that (badly) tracks movements in ^VIX.  The way the fund is constructed is they buy the 14 and 40 day futures and roll them daily.  Contango in the futures market causes them to (85% of the time or better) sell a "cheap" asset to buy an "expensive" one.  This results in a predictable long term decay that is currently averaging around 87% a year.  Reviewing the price history on Yahoo!, I have been unable to find any 12 month period where the note was up in price (it isn't even close). 

LEAP options are available and I have never lost money by buying long dated put options and holding on while waiting for decay to work its magic.  I currently hold the 18JAN2019 expiry 20 puts.  I purchased them on 12SEP2017 for 11.57 a share (1,157 per contract).  Ten days later the bid/ask split is 12.35, suggesting a 246.07% annualized return.  I have a good till canceled limit order to jump off at 12.55. 

I have completed this trade dozens of times over the last 7 years (well sort of, I started with an unleveraged version of this fund) and have been known to book profits as high as 500% annualized.  The worst I have ever done is 16% annualized.  I document every one of these trades now on my blog.  It is my highest conviction idea and was hugely important to allowing me to FIRE on 5OCT2012 at the age of 40. 

Your current trade carries a significant risk of a 100% loss.  You can stack the odds in your favor by buying long dated puts, especially deep in the money if you want to reduce risk.



I went and checked out the options chain for UVXY. Can ou explain a bit about what is going on. It looks like your contract is trading at a much higher rate than contracts with strikes close to it. Why? Separately, how do you decide when it is best to enter the trade? I assume you avoid times around reverse splits, but anything else? Very fascinating and thanks for sharing. Link to the chain https://finance.yahoo.com/quote/UVXY/options?p=UVXY&date=1547769600

Yahoo's quote system is busted for this security.  The strikes with a multiple of 5 are the current 100 share contracts.  The other strikes are pre-split.  Volume is declining because no new contracts can be written for those virtual strikes.  Entering near a split is not particularly problematic.  I find I am still able to close the contract with a no larger than normal bid/ask spread.  I usually enter during low volatility (relatively) instead of high as VIX spikes drive up the price of puts but only temporarily. 

spud1987

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Re: Fun with VIX options
« Reply #13 on: September 25, 2017, 12:54:08 PM »
Update: I'm up 10% so far. So like a 400% annual rate of return. Should've put my whole nest egg in this investment! ;)

Also, as others have mentioned, this is a very risky investment and I'm risking 100% loss of principal, which is why I limited my investment to $2k.

talltexan

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Re: Fun with VIX options
« Reply #14 on: September 26, 2017, 08:24:12 AM »
PTF

starguru

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Re: Fun with VIX options
« Reply #15 on: September 27, 2017, 06:37:45 AM »
There is a better way to play the ^VIX mania.  For about 7 years now I have made over 30% annualized on a repeatable trade.  What you want to do is use options to short UVXY.  That is a double leveraged ETN that (badly) tracks movements in ^VIX.  The way the fund is constructed is they buy the 14 and 40 day futures and roll them daily.  Contango in the futures market causes them to (85% of the time or better) sell a "cheap" asset to buy an "expensive" one.  This results in a predictable long term decay that is currently averaging around 87% a year.  Reviewing the price history on Yahoo!, I have been unable to find any 12 month period where the note was up in price (it isn't even close). 

LEAP options are available and I have never lost money by buying long dated put options and holding on while waiting for decay to work its magic.  I currently hold the 18JAN2019 expiry 20 puts.  I purchased them on 12SEP2017 for 11.57 a share (1,157 per contract).  Ten days later the bid/ask split is 12.35, suggesting a 246.07% annualized return.  I have a good till canceled limit order to jump off at 12.55. 

I have completed this trade dozens of times over the last 7 years (well sort of, I started with an unleveraged version of this fund) and have been known to book profits as high as 500% annualized.  The worst I have ever done is 16% annualized.  I document every one of these trades now on my blog.  It is my highest conviction idea and was hugely important to allowing me to FIRE on 5OCT2012 at the age of 40. 

Your current trade carries a significant risk of a 100% loss.  You can stack the odds in your favor by buying long dated puts, especially deep in the money if you want to reduce risk.

I'm having trouble following what's going on.  Can you explain this in more detail?  Also, if I wanted to do this, what is a step by step list of what to do?

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #16 on: September 27, 2017, 07:10:37 AM »
There is a better way to play the ^VIX mania.  For about 7 years now I have made over 30% annualized on a repeatable trade.  What you want to do is use options to short UVXY.  That is a double leveraged ETN that (badly) tracks movements in ^VIX.  The way the fund is constructed is they buy the 14 and 40 day futures and roll them daily.  Contango in the futures market causes them to (85% of the time or better) sell a "cheap" asset to buy an "expensive" one.  This results in a predictable long term decay that is currently averaging around 87% a year.  Reviewing the price history on Yahoo!, I have been unable to find any 12 month period where the note was up in price (it isn't even close). 

LEAP options are available and I have never lost money by buying long dated put options and holding on while waiting for decay to work its magic.  I currently hold the 18JAN2019 expiry 20 puts.  I purchased them on 12SEP2017 for 11.57 a share (1,157 per contract).  Ten days later the bid/ask split is 12.35, suggesting a 246.07% annualized return.  I have a good till canceled limit order to jump off at 12.55. 

I have completed this trade dozens of times over the last 7 years (well sort of, I started with an unleveraged version of this fund) and have been known to book profits as high as 500% annualized.  The worst I have ever done is 16% annualized.  I document every one of these trades now on my blog.  It is my highest conviction idea and was hugely important to allowing me to FIRE on 5OCT2012 at the age of 40. 

Your current trade carries a significant risk of a 100% loss.  You can stack the odds in your favor by buying long dated puts, especially deep in the money if you want to reduce risk.

I'm having trouble following what's going on.  Can you explain this in more detail?  Also, if I wanted to do this, what is a step by step list of what to do?

Starguru,

In simple terms, VXX, UVXY, and similar securities are real dogs.  They are designed (badly) to reflect the return of holding (or shorting) the ^VIX for a ONE DAY PERIOD.  Over long(er) periods of time, the construction results in rapid and predictable decay of net asset value.  See https://finance.yahoo.com/quote/UVXY/performance?p=UVXY

It is possible to make money by betting AGAINST a security.  The normal way to do this, selling shares short, doesn't work very well with UVXY because it is a very popular short with a high cost to borrow.  That is, you will pay a punishing interest rate to sell the shares short.  The workaround is to use options to create a bearish wager. 

Since the security is more or less accurate over a single day and decreasingly efficient over longer periods of time, you want to select options with as much time left to expiry as possible.  That is currently the 18JAN2019 expiry.

The lowest risk way to use options to bet against UVXY is to buy PUTS.  A put is a contract that gives you the right but not the obligation to sell shares of the underlying security into the market at the "strike" price at any time up to the expiration.  So if you purchase the 22 strike 18JAN2019 put (UVXY190118P00022000), you will be able to sell shares for 22 dollars at any time between now and February 2019.  Since shares can be expected to be much lower than that by expiration, you have an opportunity to make a profit.

Note that it isn't necessary to exercise the shares and buy them back cheap.  You can sell the put into the market directly at any time to save a step and a commission.  On about 27,000 in capital at risk, I have made so far this year:

  • $900 over 48 days
  • $1,365 over 28 days
  • $3,325 over 175 days
  • $2,376 over 6 days


That is about 30% return over just 9 months of the year.  I expect to sell another put at 12.55 soon for a profit of 2,646 and the holding period will likely be shorter than 30 days.  The WORST I have ever done with this strategy is 16% annualized. 

*NOTE: There is a small but non-zero risk of losing your entire investment in the above scenario if shares are higher than 22 at expiration.
*NOTE2: There are other ways to make a bearish bet with options but while they can be more lucrative, they are more dangerous.  I really blew up my portfolio several years ago because I was too damned greedy.  Forrest Gump's Mamma says "Stupid is as Stupid does."  The Lizard King says "Stupid is as Stupid doesn't learn from its own mistakes."

ChpBstrd

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Re: Fun with VIX options
« Reply #17 on: September 27, 2017, 07:39:24 AM »
There is a better way to play the ^VIX mania.  For about 7 years now I have made over 30% annualized on a repeatable trade.  What you want to do is use options to short UVXY.  That is a double leveraged ETN that (badly) tracks movements in ^VIX.  The way the fund is constructed is they buy the 14 and 40 day futures and roll them daily.  Contango in the futures market causes them to (85% of the time or better) sell a "cheap" asset to buy an "expensive" one.  This results in a predictable long term decay that is currently averaging around 87% a year.  Reviewing the price history on Yahoo!, I have been unable to find any 12 month period where the note was up in price (it isn't even close). 

LEAP options are available and I have never lost money by buying long dated put options and holding on while waiting for decay to work its magic.  I currently hold the 18JAN2019 expiry 20 puts.  I purchased them on 12SEP2017 for 11.57 a share (1,157 per contract).  Ten days later the bid/ask split is 12.35, suggesting a 246.07% annualized return.  I have a good till canceled limit order to jump off at 12.55. 

I have completed this trade dozens of times over the last 7 years (well sort of, I started with an unleveraged version of this fund) and have been known to book profits as high as 500% annualized.  The worst I have ever done is 16% annualized.  I document every one of these trades now on my blog.  It is my highest conviction idea and was hugely important to allowing me to FIRE on 5OCT2012 at the age of 40. 

Your current trade carries a significant risk of a 100% loss.  You can stack the odds in your favor by buying long dated puts, especially deep in the money if you want to reduce risk.

I'm having trouble following what's going on.  Can you explain this in more detail?  Also, if I wanted to do this, what is a step by step list of what to do?

Starguru,

In simple terms, VXX, UVXY, and similar securities are real dogs.  They are designed (badly) to reflect the return of holding (or shorting) the ^VIX for a ONE DAY PERIOD.  Over long(er) periods of time, the construction results in rapid and predictable decay of net asset value.  See https://finance.yahoo.com/quote/UVXY/performance?p=UVXY

It is possible to make money by betting AGAINST a security.  The normal way to do this, selling shares short, doesn't work very well with UVXY because it is a very popular short with a high cost to borrow.  That is, you will pay a punishing interest rate to sell the shares short.  The workaround is to use options to create a bearish wager. 

Since the security is more or less accurate over a single day and decreasingly efficient over longer periods of time, you want to select options with as much time left to expiry as possible.  That is currently the 18JAN2019 expiry.

The lowest risk way to use options to bet against UVXY is to buy PUTS.  A put is a contract that gives you the right but not the obligation to sell shares of the underlying security into the market at the "strike" price at any time up to the expiration.  So if you purchase the 22 strike 18JAN2019 put (UVXY190118P00022000), you will be able to sell shares for 22 dollars at any time between now and February 2019.  Since shares can be expected to be much lower than that by expiration, you have an opportunity to make a profit.

Note that it isn't necessary to exercise the shares and buy them back cheap.  You can sell the put into the market directly at any time to save a step and a commission.  On about 27,000 in capital at risk, I have made so far this year:

  • $900 over 48 days
  • $1,365 over 28 days
  • $3,325 over 175 days
  • $2,376 over 6 days


That is about 30% return over just 9 months of the year.  I expect to sell another put at 12.55 soon for a profit of 2,646 and the holding period will likely be shorter than 30 days.  The WORST I have ever done with this strategy is 16% annualized. 

*NOTE: There is a small but non-zero risk of losing your entire investment in the above scenario if shares are higher than 22 at expiration.
*NOTE2: There are other ways to make a bearish bet with options but while they can be more lucrative, they are more dangerous.  I really blew up my portfolio several years ago because I was too damned greedy.  Forrest Gump's Mamma says "Stupid is as Stupid does."  The Lizard King says "Stupid is as Stupid doesn't learn from its own mistakes."

Step one would be to go to the library and get 3-4 books about options to read until you know a crapload.

Step two is to execute a few trades in a play account before wagering real money.

Understand that options are highly volatile. Half of them expire with no value. Also, you are betting against supercomputers, so good luck. Knowing the difference between bets that increase safety and bets that could cost you five figures is critical.

starguru

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Re: Fun with VIX options
« Reply #18 on: September 27, 2017, 08:08:42 AM »
There is a better way to play the ^VIX mania.  For about 7 years now I have made over 30% annualized on a repeatable trade.  What you want to do is use options to short UVXY.  That is a double leveraged ETN that (badly) tracks movements in ^VIX.  The way the fund is constructed is they buy the 14 and 40 day futures and roll them daily.  Contango in the futures market causes them to (85% of the time or better) sell a "cheap" asset to buy an "expensive" one.  This results in a predictable long term decay that is currently averaging around 87% a year.  Reviewing the price history on Yahoo!, I have been unable to find any 12 month period where the note was up in price (it isn't even close). 

LEAP options are available and I have never lost money by buying long dated put options and holding on while waiting for decay to work its magic.  I currently hold the 18JAN2019 expiry 20 puts.  I purchased them on 12SEP2017 for 11.57 a share (1,157 per contract).  Ten days later the bid/ask split is 12.35, suggesting a 246.07% annualized return.  I have a good till canceled limit order to jump off at 12.55. 

I have completed this trade dozens of times over the last 7 years (well sort of, I started with an unleveraged version of this fund) and have been known to book profits as high as 500% annualized.  The worst I have ever done is 16% annualized.  I document every one of these trades now on my blog.  It is my highest conviction idea and was hugely important to allowing me to FIRE on 5OCT2012 at the age of 40. 

Your current trade carries a significant risk of a 100% loss.  You can stack the odds in your favor by buying long dated puts, especially deep in the money if you want to reduce risk.

I'm having trouble following what's going on.  Can you explain this in more detail?  Also, if I wanted to do this, what is a step by step list of what to do?

Starguru,

In simple terms, VXX, UVXY, and similar securities are real dogs.  They are designed (badly) to reflect the return of holding (or shorting) the ^VIX for a ONE DAY PERIOD.  Over long(er) periods of time, the construction results in rapid and predictable decay of net asset value.  See https://finance.yahoo.com/quote/UVXY/performance?p=UVXY

It is possible to make money by betting AGAINST a security.  The normal way to do this, selling shares short, doesn't work very well with UVXY because it is a very popular short with a high cost to borrow.  That is, you will pay a punishing interest rate to sell the shares short.  The workaround is to use options to create a bearish wager. 

Since the security is more or less accurate over a single day and decreasingly efficient over longer periods of time, you want to select options with as much time left to expiry as possible.  That is currently the 18JAN2019 expiry.

The lowest risk way to use options to bet against UVXY is to buy PUTS.  A put is a contract that gives you the right but not the obligation to sell shares of the underlying security into the market at the "strike" price at any time up to the expiration.  So if you purchase the 22 strike 18JAN2019 put (UVXY190118P00022000), you will be able to sell shares for 22 dollars at any time between now and February 2019.  Since shares can be expected to be much lower than that by expiration, you have an opportunity to make a profit.

Note that it isn't necessary to exercise the shares and buy them back cheap.  You can sell the put into the market directly at any time to save a step and a commission.  On about 27,000 in capital at risk, I have made so far this year:

  • $900 over 48 days
  • $1,365 over 28 days
  • $3,325 over 175 days
  • $2,376 over 6 days


That is about 30% return over just 9 months of the year.  I expect to sell another put at 12.55 soon for a profit of 2,646 and the holding period will likely be shorter than 30 days.  The WORST I have ever done with this strategy is 16% annualized. 

*NOTE: There is a small but non-zero risk of losing your entire investment in the above scenario if shares are higher than 22 at expiration.
*NOTE2: There are other ways to make a bearish bet with options but while they can be more lucrative, they are more dangerous.  I really blew up my portfolio several years ago because I was too damned greedy.  Forrest Gump's Mamma says "Stupid is as Stupid does."  The Lizard King says "Stupid is as Stupid doesn't learn from its own mistakes."

Step one would be to go to the library and get 3-4 books about options to read until you know a crapload.

Step two is to execute a few trades in a play account before wagering real money.

Understand that options are highly volatile. Half of them expire with no value. Also, you are betting against supercomputers, so good luck. Knowing the difference between bets that increase safety and bets that could cost you five figures is critical.

Thank you for the both of you, especially Financial.Velociraptor, for the explanation.  I should have made clear that I understood the difference between buying PUT and CALL options, but I wasn't clear what was going on with this trade.  FV also mentioned LEAP, and I don't know what that is.

Where does one even do these trades?

Edit to ask, FV how are you deciding when to sell and when to rebuy?
« Last Edit: September 27, 2017, 08:10:46 AM by starguru »

Financial.Velociraptor

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Re: Fun with VIX options
« Reply #19 on: September 27, 2017, 09:58:12 AM »
Thank you for the both of you, especially Financial.Velociraptor, for the explanation.  I should have made clear that I understood the difference between buying PUT and CALL options, but I wasn't clear what was going on with this trade.  FV also mentioned LEAP, and I don't know what that is.

Where does one even do these trades?

Edit to ask, FV how are you deciding when to sell and when to rebuy?

A LEAP is a long dated options security.  See: https://en.wikipedia.org/wiki/LEAPS_(finance)

Virtually any online broker will let you trade long puts so long as you have sufficient cash.  I use Interactive Brokers. Select the 'options' tab; flip the flags for 'buy' and 'put'; select a strike; select an expiry; make a limit order and then be patient.

I have been buying about 30% out of the  money and selling when the options move into the money.  Sometimes I hold to pick up some intrinsic value.  It's more art than science.  I usually roll to a lower strike immediately.  Since the long term average decay is over 80% a year, it makes a lot of sense to maximize my time in the trade.  You can see my recent history in this trade on my blog: http://velociraptor.cc.  I record both buys and sells publicly.


starguru

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Re: Fun with VIX options
« Reply #20 on: September 27, 2017, 03:26:58 PM »
I am wondering how is this even possible?  Wouldn’t everyone be doing it if it were so great?

If I wanted to do this now what would the best strategy be?  Say I wanted to play with 10k?  Should I buy 2500 worth of PUTS on UVXY each month for 4 months? 

Also with options as I understand them every winner has a loser.   What are people who sell PUTS on this security betting on?


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Re: Fun with VIX options
« Reply #21 on: September 27, 2017, 03:47:09 PM »
I am wondering how is this even possible?  Wouldn’t everyone be doing it if it were so great?

If I wanted to do this now what would the best strategy be?  Say I wanted to play with 10k?  Should I buy 2500 worth of PUTS on UVXY each month for 4 months? 

Also with options as I understand them every winner has a loser.   What are people who sell PUTS on this security betting on?


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Anytime you buy a put between the bid/ask, someone acted as market maker.  That may be the official market maker at the exchange or a lightning fast hedge fund that beats them to the punch.  Market makers typically play 'both ends against the middle'.  They have a fully hedged position (no risk), be it hedged with the underlying, another strike, a call, whatever.  Most times, they actually "took you" for a few cents per share in arbitrage profits.  While UVXY is intended to work over a day, a market maker is looking at a period of time measured in seconds.  For a more theoretical discussion see: https://en.wikipedia.org/wiki/Put%E2%80%93call_parity

Why isn't everyone doing it?  Beats me.  I've been posting about this on my blog for over a year and only a handful of people are doing their own trades as far as I can tell.  I've seen a couple news articles over the years where it was noted someone bought a "large" amount of puts.  Large enough to be newsworthy such as 50MM.

I usually go all in with my full allocation immediately instead of trying to dollar cost average over a period of time.  My next trade is going to be an A/B test on multiple strikes to see which has the best return profile.  I'll go about 10 dollars out of the money and 10 dollars in the money and see what happens.

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Re: Fun with VIX options
« Reply #22 on: September 27, 2017, 04:00:16 PM »
I am wondering how is this even possible?  Wouldn’t everyone be doing it if it were so great?

If I wanted to do this now what would the best strategy be?  Say I wanted to play with 10k?  Should I buy 2500 worth of PUTS on UVXY each month for 4 months? 

Also with options as I understand them every winner has a loser.   What are people who sell PUTS on this security betting on?


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1) Smart questions. Options are essentially zero-net-
sum gambling. You face a non-negligible risk of 100% loss. Also, this has become an increasingly crowded trade, which is why the liquidity is good. See many recent financial news articles.

2) Buy $300 worth of the longest-dated puts available. This is play money you can afford to speculate, not your whole savings. Preferably pick the strike price with the highest delta. Vow to hold the puts for at least 6 mos even as they swing +/- 50% in price and behave weirdly. Note that a 1 for 5 reverse split is likely when the price gets below $10. Consider gambling more with experience.

3) Options prices are a factor of the stock's volatility. UVXY is very volatile in the short term, but has a clear downward trend long-term due to stable factors. Options pricing models don't look at trend or the underlying structure of the instrument - they factor in price and volatility. So asymmetrical information is your edge against the supercomputer. You know it's volatile and it sucks. The computer only knows it's volatile. That's the theory anyway.

Who is selling you the puts? Probably computers and other investors setting up vertical spreads, butterflies, iron condors, and other multi-leg strategies with a potential losses of less than 100%. Many of these strategies make sense for your fellow bearish investors with less risk tolerance.

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Re: Fun with VIX options
« Reply #23 on: September 27, 2017, 04:41:52 PM »
On the UVXY fund description page I see this

"Intended for short-term use; investors should actively manage and monitor their investments, as frequently as daily."

Something seems "broken" to me if investors can play long term games with a security that is fundamentally intentioned for short-term use.  Also, I'm trying to understand what an investor who buys PUT options on UVXY is betting on.

"UVXY provides leveraged exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration."

So there is VIX, short-term futures, and weighted average of one month to expiration.  What is going on here at a fundamental level?


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Re: Fun with VIX options
« Reply #24 on: September 27, 2017, 04:53:58 PM »
On the UVXY fund description page I see this

"Intended for short-term use; investors should actively manage and monitor their investments, as frequently as daily."

Something seems "broken" to me if investors can play long term games with a security that is fundamentally intentioned for short-term use.  Also, I'm trying to understand what an investor who buys PUT options on UVXY is betting on.

"UVXY provides leveraged exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration."

So there is VIX, short-term futures, and weighted average of one month to expiration.  What is going on here at a fundamental level?

The security is designed with a short view in mind.  They never intended anyone to make long term speculations around the product.  Therein they missed something huge.  It is a no-brainer to make long term bets against the product.  This doesn't trouble the issuer as they earn a load on the Net Asset Value.  People keep plowing new funds into the product for short term speculation so it doesn't matter that the product decays like mad.  It should be against the law but isn't.

In essence, UVXY is a double leveraged portfolio of ^VIX futures (you can't buy ^VIX directly.)  It technically doesn't exist.  You are dealing with a synthetic commodity.  The portfolio is composed of 14 and 40 day ^VIX futures.  On any given day, these have a discreet market value (The NAV).  When you buy UVXY puts, you are buying the right to sell UVXY at the strike price.  This is a position that gains from decreases in the price of UVXY.  We know that most of the time UVXY will decay because those 14 and 40 day futures have to be rolled daily.  Since the 40 day futures have more 'time value' than the shorter term 14 day futures, they must sell a "cheap" asset to buy an "expensive" one.  This is know as 'contango'.   Else, see 'backwardation': https://en.wikipedia.org/wiki/Normal_backwardation

ChpBstrd made some good points.  There is a non zero chance of losing 100% of the investment.  In essence, this is a 'time arbitrage' investment.

starguru

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Re: Fun with VIX options
« Reply #25 on: September 27, 2017, 05:03:07 PM »
On the UVXY fund description page I see this

"Intended for short-term use; investors should actively manage and monitor their investments, as frequently as daily."

Something seems "broken" to me if investors can play long term games with a security that is fundamentally intentioned for short-term use.  Also, I'm trying to understand what an investor who buys PUT options on UVXY is betting on.

"UVXY provides leveraged exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration."

So there is VIX, short-term futures, and weighted average of one month to expiration.  What is going on here at a fundamental level?

The security is designed with a short view in mind.  They never intended anyone to make long term speculations around the product.  Therein they missed something huge.  It is a no-brainer to make long term bets against the product.  This doesn't trouble the issuer as they earn a load on the Net Asset Value.  People keep plowing new funds into the product for short term speculation so it doesn't matter that the product decays like mad.  It should be against the law but isn't.

In essence, UVXY is a double leveraged portfolio of ^VIX futures (you can't buy ^VIX directly.)  It technically doesn't exist.  You are dealing with a synthetic commodity.  The portfolio is composed of 14 and 40 day ^VIX futures.  On any given day, these have a discreet market value (The NAV).  When you buy UVXY puts, you are buying the right to sell UVXY at the strike price.  This is a position that gains from decreases in the price of UVXY.  We know that most of the time UVXY will decay because those 14 and 40 day futures have to be rolled daily.  Since the 40 day futures have more 'time value' than the shorter term 14 day futures, they must sell a "cheap" asset to buy an "expensive" one.  This is know as 'contango'.   Else, see 'backwardation': https://en.wikipedia.org/wiki/Normal_backwardation

ChpBstrd made some good points.  There is a non zero chance of losing 100% of the investment.  In essence, this is a 'time arbitrage' investment.

FV I really appreciate your patience with my questions.  When I asked about what is fundamentally going on with this bet I meant in terms of the economy and/or the SP500.  So is it a bet that the SP500 goes up or down?  Something different?  Is it a bet for increased or decreased volatility? 

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Re: Fun with VIX options
« Reply #26 on: September 27, 2017, 08:28:05 PM »


FV I really appreciate your patience with my questions.  When I asked about what is fundamentally going on with this bet I meant in terms of the economy and/or the SP500.  So is it a bet that the SP500 goes up or down?  Something different?  Is it a bet for increased or decreased volatility?

Most of the time (overwhelming so) ^VIX and UVXY are countercyclical.   If the SP500 is up, VIX/UVXY will be down.  And vice-versa.  But this is not a bet on the economy grinding higher.  It is a bet on the power of contango in the futures markets.  Over "long" periods of time, UVXY is going to decline, even if the SP500 is down 50%.  Volatility and SP500 moves matter in the short term only.  With a LEAP put, you are counting on the long term decay from rolling futures.   It is the time frame that matters, not what happens in the market in the interim.

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Re: Fun with VIX options
« Reply #27 on: September 27, 2017, 08:46:28 PM »


FV I really appreciate your patience with my questions.  When I asked about what is fundamentally going on with this bet I meant in terms of the economy and/or the SP500.  So is it a bet that the SP500 goes up or down?  Something different?  Is it a bet for increased or decreased volatility?

Most of the time (overwhelming so) ^VIX and UVXY are countercyclical.   If the SP500 is up, VIX/UVXY will be down.  And vice-versa.  But this is not a bet on the economy grinding higher.  It is a bet on the power of contango in the futures markets.  Over "long" periods of time, UVXY is going to decline, even if the SP500 is down 50%.  Volatility and SP500 moves matter in the short term only.  With a LEAP put, you are counting on the long term decay from rolling futures.   It is the time frame that matters, not what happens in the market in the interim.

A few more questions, if you are willing to humor me. 

1.  How do you decide on a strike price for your options?
2.  If the theory is this security constantly declines (with some bumps),  I don't understand why you would sell your options until close to settle date.   Especially if when you sell you just roll your profits into new positions.
3.  I still don't understand why anyone would write these long options on this security.  I can understand why writing short term options might make sense (although Im not smart enough to think of any) but long term options seem like suicide. 

Man eTrade's option form is just terrible.

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Re: Fun with VIX options
« Reply #28 on: September 27, 2017, 09:02:23 PM »

A few more questions, if you are willing to humor me. 

1.  How do you decide on a strike price for your options?
2.  If the theory is this security constantly declines (with some bumps),  I don't understand why you would sell your options until close to settle date.   Especially if when you sell you just roll your profits into new positions.
3.  I still don't understand why anyone would write these long options on this security.  I can understand why writing short term options might make sense (although Im not smart enough to think of any) but long term options seem like suicide. 

Man eTrade's option form is just terrible.

1.  It has been trial and error. I hope to improve on this in the next cycle with some A/B testing on multiple strikes at the same time.
2.  It is peculiar matter of arithmetic.  Two declines of 50% are not 100% decline but rather 75%.   You capture more downside by rolling frequently.  e.g. collect 50% twice instead of 75% once...
3.  You'd be mad to sell a long dated put on its own.  The market maker is engaged in arbitrage involving multiple legs, and/or the underlying security.  The MM earns a sliver of an immediate return of a few pennies per share.  Your long term prospects are irrelevant to the market maker.  In short, your counter-party is hedged. 

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Re: Fun with VIX options
« Reply #29 on: September 27, 2017, 09:38:58 PM »
FV I really appreciate your patience with my questions.  When I asked about what is fundamentally going on with this bet I meant in terms of the economy and/or the SP500.  So is it a bet that the SP500 goes up or down?  Something different?  Is it a bet for increased or decreased volatility?

See https://sixfigureinvesting.com/2015/03/how-does-uvxy-work/.

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Re: Fun with VIX options
« Reply #30 on: September 28, 2017, 07:57:05 AM »
Thanks ChpBstrd. 

I'm debating doing the options trading at Fidelity.  Has anyone done this thru them or is it better to use some other venue?  Etrade's form is so bad I'm not going to use it.

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Re: Fun with VIX options
« Reply #31 on: September 28, 2017, 10:03:50 AM »

starguru

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Re: Fun with VIX options
« Reply #32 on: September 28, 2017, 10:16:49 AM »


See https://sixfigureinvesting.com/2015/03/how-does-uvxy-work/.

That link led me to this one: https://sixfigureinvesting.com/2016/10/is-shorting-uvxy-tvix-vxx-the-perfect-trade/ which outlines a similar set of approaches.
[/quote]

Yes very interesting.  The article points out the logical fact that in certain situations short positions in general can go sideways really fast.  The interesting thing about FV trade is that buying a long dated put there is a relatively large window for the position to move back into the money. 

A question about volatility.  A quick google search leads to this definition

"Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index."

So if prices drop really quickly due to a market crash for whatever reason, and then rise just as fast during the recovery (a-la 2008-2009), volatility is high for that entire period, right?  How does that play into the UVXY trade, specifically the 14 and 40 day dance UVXY uses?

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Re: Fun with VIX options
« Reply #33 on: September 28, 2017, 11:44:26 AM »
When we talk VIX, the definition of the volatilely is as the CBOE defines it based on equity options priced, not the how the math professors may define it.

Since the VIX is based on prices of individual equity options, its the markets implied expected variation.  To your example, the market can move quite a bit, but that doesn't mean the various VIX products will if the market thinks the market move will reverse itself.  At least this often appears to be the case with VIX options.  Remember, you can never buy VIX, only things that are in some way derivative of it.

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Re: Fun with VIX options
« Reply #34 on: September 28, 2017, 03:11:30 PM »
Yes very interesting.  The article points out the logical fact that in certain situations short positions in general can go sideways really fast.  The interesting thing about FV trade is that buying a long dated put there is a relatively large window for the position to move back into the money. 


Exactly this.  If you buy a put with 4 weeks to expiry, the odds of a 100% loss of investment are high.  If you buy a put with over a year till expiry, the outcome is highly certain.

starguru

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Re: Fun with VIX options
« Reply #35 on: September 28, 2017, 03:13:52 PM »
Yes very interesting.  The article points out the logical fact that in certain situations short positions in general can go sideways really fast.  The interesting thing about FV trade is that buying a long dated put there is a relatively large window for the position to move back into the money. 


Exactly this.  If you buy a put with 4 weeks to expiry, the odds of a 100% loss of investment are high.  If you buy a put with over a year till expiry, the outcome is highly certain.

How long would you say you keep your options before selling on the open market?  For safety I would think you would want to cycle as fast as possible, so your options are always far in the future, so you can recover from any potential disaster...

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Re: Fun with VIX options
« Reply #36 on: September 28, 2017, 04:04:08 PM »

How long would you say you keep your options before selling on the open market?  For safety I would think you would want to cycle as fast as possible, so your options are always far in the future, so you can recover from any potential disaster...

I sell when I have a gain I'm happy with.  I prefer to hold at least 30 days but sometimes I get opportunites faster than that that are too good to pass up.  I've had 4 sales this year and the holding periods were: 48 days, 28 days, 175 days, and 6 days.  My current puts are approaching an exit point and are at 17 days as of today.

starguru

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Re: Fun with VIX options
« Reply #37 on: September 29, 2017, 08:48:07 AM »
Ok so I added the options trade ability to my Roth IRA.  I've attached a screenshot of the trade form and want to make sure I've done this right.

"Buy to open" means buying to open a position. 
"Quantity" 3 means 3 contracts, 100 shares per contract.
"Expiration" means the date upon which my option expire (Jan 18 2019)
"Strike" of 21 means the price of the shares of UXVY under which I make money (accounting for the fact that I am paying a premium per share to open the contract).  I see options (har har) in the strike price menu for 21 Adj and 21 Adj 3 which I don't understand

In the Bid/Ask section it seems like writers of PUT options for that date want $13.25 per share.  If I understand this correctly, this means, if I pay the ask price, the security needs to fall to under 21-13.25=7.75 for me to make money?  This also seems to imply that my max profit is 7.75 per share, so 775 for each contract, and if I bought 3 contracts that is 2325. 

 

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Re: Fun with VIX options
« Reply #38 on: September 29, 2017, 08:57:58 AM »
Ok so I added the options trade ability to my Roth IRA.  I've attached a screenshot of the trade form and want to make sure I've done this right.

"Buy to open" means buying to open a position. 
"Quantity" 3 means 3 contracts, 100 shares per contract.
"Expiration" means the date upon which my option expire (Jan 18 2019)
"Strike" of 21 means the price of the shares of UXVY under which I make money (accounting for the fact that I am paying a premium per share to open the contract).  I see options (har har) in the strike price menu for 21 Adj and 21 Adj 3 which I don't understand

In the Bid/Ask section it seems like writers of PUT options for that date want $13.25 per share.  If I understand this correctly, this means, if I pay the ask price, the security needs to fall to under 21-13.25=7.75 for me to make money?  This also seems to imply that my max profit is 7.75 per share, so 775 for each contract, and if I bought 3 contracts that is 2325.

My guess is 21 adj and 21 adj 3 are the post split shares. 

Don't pay the ask.  Put in a limit order between the bid/ask and be patient. 

Your math is correct if you hold till expiration.  If you roll the option before expiration, some of the 13.25 time value will still be active.  For example, I bought the 20 strike 18JAN2019 put for 11.57 on 12SEP2017.  I have a good till canceled limit to sell at 12.55.  Most of that will be time value and only a little, if any, will be "intrinsic value" i.e. the amount the option is in the money.  Time value always drops to zero at expiry.

starguru

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Re: Fun with VIX options
« Reply #39 on: September 29, 2017, 09:06:21 AM »
Ok so I added the options trade ability to my Roth IRA.  I've attached a screenshot of the trade form and want to make sure I've done this right.

"Buy to open" means buying to open a position. 
"Quantity" 3 means 3 contracts, 100 shares per contract.
"Expiration" means the date upon which my option expire (Jan 18 2019)
"Strike" of 21 means the price of the shares of UXVY under which I make money (accounting for the fact that I am paying a premium per share to open the contract).  I see options (har har) in the strike price menu for 21 Adj and 21 Adj 3 which I don't understand

In the Bid/Ask section it seems like writers of PUT options for that date want $13.25 per share.  If I understand this correctly, this means, if I pay the ask price, the security needs to fall to under 21-13.25=7.75 for me to make money?  This also seems to imply that my max profit is 7.75 per share, so 775 for each contract, and if I bought 3 contracts that is 2325.

My guess is 21 adj and 21 adj 3 are the post split shares. 

Don't pay the ask.  Put in a limit order between the bid/ask and be patient. 

Your math is correct if you hold till expiration.  If you roll the option before expiration, some of the 13.25 time value will still be active.  For example, I bought the 20 strike 18JAN2019 put for 11.57 on 12SEP2017.  I have a good till canceled limit to sell at 12.55.  Most of that will be time value and only a little, if any, will be "intrinsic value" i.e. the amount the option is in the money.  Time value always drops to zero at expiry.

When you say sell at 12.55, do you mean execute your options when the uvxy price hits 12.55, or sell your options if someone is willing to offer you 12.55 per share?

Edit:  while exercising it dawned on me that you probably mean sell your option.  If your limit sells for 12.55, you will have made 12.55-11.57 per share (minus trading costs).

So if you had to open a position now which strike would you use?  I could get the 20 strike for 12.40 or the 19 for 11.40.  Is there any practical difference between these?  It seems that if the strike changes by a dollar, the ask also changes by a dollar.
« Last Edit: September 29, 2017, 09:50:32 AM by starguru »

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Re: Fun with VIX options
« Reply #40 on: September 29, 2017, 09:54:15 AM »

When you say sell at 12.55, do you mean execute your options when the uvxy price hits 12.55, or sell your options if someone is willing to offer you 12.55 per share?

Edit:  while exercising it dawned on me that you probably mean sell your option.  If your limit sells for 12.55, you will have made 12.55-11.57 per share (minus trading costs).

So if you had to open a position now which strike would you use?  I could get the 20 strike for 12.40 or the 19 for 11.40.  Is there any practical difference between these?  It seems that if the strike changes by a dollar, the ask also changes by a dollar.

I mean sell the option, not execute it.  You have it right.  Your math is also right (trading costs are trivial at Interactive Brokers, less than 1 dollar per contract).

I usually open my position about 25-30% out of the money.  This is 'more risky' than going at the money or in the money.  Next time, I'm going to try going in the money by 25% and also out by 25% to A/B test how they perform.  Really, it doesn't make a whole lot of difference what strike you pick I think.  The decay of UVXY is steep enough to overcome most any error in execution.

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Re: Fun with VIX options
« Reply #41 on: September 29, 2017, 10:03:38 AM »

When you say sell at 12.55, do you mean execute your options when the uvxy price hits 12.55, or sell your options if someone is willing to offer you 12.55 per share?

Edit:  while exercising it dawned on me that you probably mean sell your option.  If your limit sells for 12.55, you will have made 12.55-11.57 per share (minus trading costs).

So if you had to open a position now which strike would you use?  I could get the 20 strike for 12.40 or the 19 for 11.40.  Is there any practical difference between these?  It seems that if the strike changes by a dollar, the ask also changes by a dollar.

I mean sell the option, not execute it.  You have it right.  Your math is also right (trading costs are trivial at Interactive Brokers, less than 1 dollar per contract).

I usually open my position about 25-30% out of the money.  This is 'more risky' than going at the money or in the money.  Next time, I'm going to try going in the money by 25% and also out by 25% to A/B test how they perform.  Really, it doesn't make a whole lot of difference what strike you pick I think.  The decay of UVXY is steep enough to overcome most any error in execution.

And you just well when you are happy?   If you have a limit order to sell it seems like there is some planning going on. 

Anyway, I just set up an order to sell $5000 worth of FSTVX, which means I can't do anything today anyway.  Ill start small with 1 contract and then build from there as I understand more.  Thanx for putting me on to this!

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Re: Fun with VIX options
« Reply #42 on: September 29, 2017, 12:52:59 PM »

When you say sell at 12.55, do you mean execute your options when the uvxy price hits 12.55, or sell your options if someone is willing to offer you 12.55 per share?

Edit:  while exercising it dawned on me that you probably mean sell your option.  If your limit sells for 12.55, you will have made 12.55-11.57 per share (minus trading costs).

So if you had to open a position now which strike would you use?  I could get the 20 strike for 12.40 or the 19 for 11.40.  Is there any practical difference between these?  It seems that if the strike changes by a dollar, the ask also changes by a dollar.

I mean sell the option, not execute it.  You have it right.  Your math is also right (trading costs are trivial at Interactive Brokers, less than 1 dollar per contract).

I usually open my position about 25-30% out of the money.  This is 'more risky' than going at the money or in the money.  Next time, I'm going to try going in the money by 25% and also out by 25% to A/B test how they perform.  Really, it doesn't make a whole lot of difference what strike you pick I think.  The decay of UVXY is steep enough to overcome most any error in execution.

But to be clear if you make 12.55-11.57 you then have to back out the loss from the bid ask spread right? it looks like for the jan 2019 options that is ~20-40 cents. Is that right?

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Re: Fun with VIX options
« Reply #43 on: September 29, 2017, 01:01:42 PM »
But to be clear if you make 12.55-11.57 you then have to back out the loss from the bid ask spread right? it looks like for the jan 2019 options that is ~20-40 cents. Is that right?

If I understand correctly, he has a limit order to sell at 12.55.  That would be the "ask" for someone looking to buy his options.  When he bought, his 11.57 was his bid, or what he otherwise ended up paying. 

So bid/ask doesn't come into this calculation.  It is already included in those numbers.

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Re: Fun with VIX options
« Reply #44 on: September 29, 2017, 10:49:06 PM »

When you say sell at 12.55, do you mean execute your options when the uvxy price hits 12.55, or sell your options if someone is willing to offer you 12.55 per share?

Edit:  while exercising it dawned on me that you probably mean sell your option.  If your limit sells for 12.55, you will have made 12.55-11.57 per share (minus trading costs).

So if you had to open a position now which strike would you use?  I could get the 20 strike for 12.40 or the 19 for 11.40.  Is there any practical difference between these?  It seems that if the strike changes by a dollar, the ask also changes by a dollar.

I mean sell the option, not execute it.  You have it right.  Your math is also right (trading costs are trivial at Interactive Brokers, less than 1 dollar per contract).

I usually open my position about 25-30% out of the money.  This is 'more risky' than going at the money or in the money.  Next time, I'm going to try going in the money by 25% and also out by 25% to A/B test how they perform.  Really, it doesn't make a whole lot of difference what strike you pick I think.  The decay of UVXY is steep enough to overcome most any error in execution.

I looked up the option price chain for the Jan 2019 20 strikes http://www.nasdaq.com/symbol/uvxy/option-chain/190118P00020000-uvxy-put

If you go to the 1 year view you see some pretty big nose dives in value. What was your logic in your entry point to avoid being on the wrong side?

Additionally I was playing with this profit calculator, here: http://www.optionsprofitcalculator.com/calculator/long-put.html, and it looks like a step fall needs to happen within the first couple of months, even on the long leap contracts, in order to see a return. Using a Jan 2019 15 strike put it looks like you are seeing a 3% return in May 2018 if the price falls to $10. This seems like not a good return profile and I am wondering if the calculator is not anticipating some factor that you are.

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Re: Fun with VIX options
« Reply #45 on: September 30, 2017, 09:00:57 AM »
I looked up the option price chain for the Jan 2019 20 strikes http://www.nasdaq.com/symbol/uvxy/option-chain/190118P00020000-uvxy-put

If you go to the 1 year view you see some pretty big nose dives in value. What was your logic in your entry point to avoid being on the wrong side?

Additionally I was playing with this profit calculator, here: http://www.optionsprofitcalculator.com/calculator/long-put.html, and it looks like a step fall needs to happen within the first couple of months, even on the long leap contracts, in order to see a return. Using a Jan 2019 15 strike put it looks like you are seeing a 3% return in May 2018 if the price falls to $10. This seems like not a good return profile and I am wondering if the calculator is not anticipating some factor that you are.

My logic isn't in entry point, it is in duration of the expiry.  Short dated options have a high likelihood of a 100% loss of investment.  Given "enough" time, UVXY will always decay a "large" amount.  This ensures, if not a profit, at least some "moneyness" and recovery of part of capital.  You can improve your odds by going into the money.  The deeper you go, the lower your risk and alas lower your return.

You are correct that the best returns come when the decay happens shortly after buying the put.  My two recent sales where 11.6% gain over 175 days and 9.6% over 6 days.  Obviously, you'd rather repeat the 6 day trade.  I once had the position move strongly against me a few days after entering.  I had to hold 317 days to get a good exit point that yielded about 16% annualized.  That is a "weak" return for this strategy but a damn good one for almost any other trade you can expect to make.  And that is why you want the long dated options.  Sometimes you need a little more time to be right, as in sufficiently in the money to profit.

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Re: Fun with VIX options
« Reply #46 on: September 30, 2017, 09:21:12 AM »
I looked up the option price chain for the Jan 2019 20 strikes http://www.nasdaq.com/symbol/uvxy/option-chain/190118P00020000-uvxy-put

If you go to the 1 year view you see some pretty big nose dives in value. What was your logic in your entry point to avoid being on the wrong side?

Additionally I was playing with this profit calculator, here: http://www.optionsprofitcalculator.com/calculator/long-put.html, and it looks like a step fall needs to happen within the first couple of months, even on the long leap contracts, in order to see a return. Using a Jan 2019 15 strike put it looks like you are seeing a 3% return in May 2018 if the price falls to $10. This seems like not a good return profile and I am wondering if the calculator is not anticipating some factor that you are.

My logic isn't in entry point, it is in duration of the expiry.  Short dated options have a high likelihood of a 100% loss of investment.  Given "enough" time, UVXY will always decay a "large" amount.  This ensures, if not a profit, at least some "moneyness" and recovery of part of capital.  You can improve your odds by going into the money.  The deeper you go, the lower your risk and alas lower your return.

You are correct that the best returns come when the decay happens shortly after buying the put.  My two recent sales where 11.6% gain over 175 days and 9.6% over 6 days.  Obviously, you'd rather repeat the 6 day trade.  I once had the position move strongly against me a few days after entering.  I had to hold 317 days to get a good exit point that yielded about 16% annualized.  That is a "weak" return for this strategy but a damn good one for almost any other trade you can expect to make.  And that is why you want the long dated options.  Sometimes you need a little more time to be right, as in sufficiently in the money to profit.

For a beginner strategy is it a good idea to just set a sell price 10% higher than your purchase?  I wonder,  for your options that took 300+ days to turn a profit, if you had other tranches during that 300 days,  would they have turned a profit before the 350 day tranche?


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Re: Fun with VIX options
« Reply #47 on: September 30, 2017, 11:38:29 AM »

For a beginner strategy is it a good idea to just set a sell price 10% higher than your purchase?  I wonder,  for your options that took 300+ days to turn a profit, if you had other tranches during that 300 days,  would they have turned a profit before the 350 day tranche?


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I suppose setting a good till cancel limit order to sell 5-10% above your entry point is reasonable.  I wouldn't set it 50%.  The idea is bunt repeatedly, not hit any grand slams. 

If I had other tranches during the 300 day slump they probably would have turned over faster.  But as a matter of managing my own psychology, I don't want to go down such rabbit holes.  Making "just" 16% annualized on a repeated basis will make you very wealthy over a period of decades.  Trying for more seems like a recipe for shooting yourself in the foot with hubris.  And I frequently make more on shorter trades without even 'reaching'.  At some point you have to recognize when you are at 'enough'.

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Re: Fun with VIX options
« Reply #48 on: September 30, 2017, 12:18:37 PM »

For a beginner strategy is it a good idea to just set a sell price 10% higher than your purchase?  I wonder,  for your options that took 300+ days to turn a profit, if you had other tranches during that 300 days,  would they have turned a profit before the 350 day tranche?


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I suppose setting a good till cancel limit order to sell 5-10% above your entry point is reasonable.  I wouldn't set it 50%.  The idea is bunt repeatedly, not hit any grand slams. 

If I had other tranches during the 300 day slump they probably would have turned over faster.  But as a matter of managing my own psychology, I don't want to go down such rabbit holes.  Making "just" 16% annualized on a repeated basis will make you very wealthy over a period of decades.  Trying for more seems like a recipe for shooting yourself in the foot with hubris.  And I frequently make more on shorter trades without even 'reaching'.  At some point you have to recognize when you are at 'enough'.

Interesting what you mention re psychology.  I have about 150k coming to me in the next 3 weeks or so.  I’ll have to restrain myself. 

I was thinking of buying one or two contracts a month so as to get a pipeline effect going, and reducing my risk of losing the entire investment.


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Re: Fun with VIX options
« Reply #49 on: September 30, 2017, 12:49:45 PM »
I looked up the option price chain for the Jan 2019 20 strikes http://www.nasdaq.com/symbol/uvxy/option-chain/190118P00020000-uvxy-put

If you go to the 1 year view you see some pretty big nose dives in value. What was your logic in your entry point to avoid being on the wrong side?

Additionally I was playing with this profit calculator, here: http://www.optionsprofitcalculator.com/calculator/long-put.html, and it looks like a step fall needs to happen within the first couple of months, even on the long leap contracts, in order to see a return. Using a Jan 2019 15 strike put it looks like you are seeing a 3% return in May 2018 if the price falls to $10. This seems like not a good return profile and I am wondering if the calculator is not anticipating some factor that you are.

My logic isn't in entry point, it is in duration of the expiry.  Short dated options have a high likelihood of a 100% loss of investment.  Given "enough" time, UVXY will always decay a "large" amount.  This ensures, if not a profit, at least some "moneyness" and recovery of part of capital.  You can improve your odds by going into the money.  The deeper you go, the lower your risk and alas lower your return.

You are correct that the best returns come when the decay happens shortly after buying the put.  My two recent sales where 11.6% gain over 175 days and 9.6% over 6 days.  Obviously, you'd rather repeat the 6 day trade.  I once had the position move strongly against me a few days after entering.  I had to hold 317 days to get a good exit point that yielded about 16% annualized.  That is a "weak" return for this strategy but a damn good one for almost any other trade you can expect to make.  And that is why you want the long dated options.  Sometimes you need a little more time to be right, as in sufficiently in the money to profit.


First, I wanted to say thanks FinanceVelociraptor. It is so hard to find people willing to share their experience in this arena and you have been extremely helpful. This is one of my favorite things to talk about / study and it is hard to find engaging conversation and quality writing on it like you have provided on this thread and your site. I want to be cognizant of your time but did want to share some additional thoughts.

I think I understand your position that taking the long view is what creates value in this trade. But to me there are a couple of risk factors.

1) As mentioned in my previous comment, I am still wondering how much entry matters. For example, consider today. VIX is at $9.50 which is nearly a 52 week low. Yahoo says 8.84 is the low, but I do not see that actual dot on their chart.  UVXY is at 20.58 which is right on its low of 20.51.

At the risk of seeming to peer into a fake crystal ball, I wonder if it is a bad idea to buy then because it seems more likely that VIX would rise, UVXY would rise at some factor, and then possibly the decline would not be swift enough for your position to make money. Though I wonder if I am wrong because when you bought on SEPT 12, that was the then low for UVXY. On SEPT 12, VIX was slightly higher, but had declined from a recent 20% spike (going from 10-12 the week of September the 5th).

2) is the reverse splits, if liquidity dries up when a reverse splits happen, if you are holding when a reverse split happens, are you not forced to sell before the split, or risk paying terrible spreads? Does this effectively limit the time horizon of you options? Put another way in case that is confusing. Say you have an 18 month leap, but UVXY reverse splits every 6 months (just making a number up) then due to liquidity issues you do not really have 18 months to make money, you have about 6. No?

I tried to do some more analysis, with the hypothesis that for example if UVXY is above its 30 or 50 day SMA, then this trade is good. Now I dont have access to historical option prices, but you can see that typically when this occurs (and it doesnt happen off in bull markets) that UVXY does fall precipitously. What keeps me from saying do this every time there is a spike in UVXY, is that I do not understand what the vega risk would be during a time of spiking VIX. I wonder if it would be similar to getting vol crushed if you buy and OTM SPY call after a fall in SPY, where even if SPY recovers, too much of the value of the option is in volatility, so you end up losing money. Did you worry about Vega risk when entering your position on 9/12 as it came after a recent VIX bump up? Perhaps you feel the contango phenomenon trumps all of these considerations....