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....