### Author Topic: Fun with VIX options  (Read 44372 times)

#### starguru

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##### Re: Fun with VIX options
« Reply #100 on: November 06, 2017, 04:06:18 PM »
I bought my 15 strike Put at 9.85 when it was OTM. Now it is ITM and still not close to 9.85 (I think it is around 9.60 tops) not sure what I did wrong, but wondering if anyone has any feedback. Almost every contract was up at least a % today save for mine :(

Yeah I'm having the same problem with my 17 strike.  It doesn't seem to be appreciating even though the underlying is decaying.  The only thing I can think of is that perhaps the B/A spread was pretty wide and I bid too close to the ask.  Maybe you did the same.

#### ILikeDividends

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##### Re: Fun with VIX options
« Reply #101 on: November 06, 2017, 04:27:32 PM »

I agree that annualized number is mostly fluff for the reasons you mentioned.  The only number that matters is the amount you made compared against the amount you invested.   Still, I'm perturbed that I can't get that formula to spit out the right value.  You have to search the page for the correct calculation, search for "annualized equivalent".

I'm only guessing, but I suppose you might be missing that the 1/.50 part of the article's formula is an exponent.

If you have Excel, try this formula: =POWER(1+0.05,1/0.5)-1

Using the numbers from the example, it equals 0.1025, as it should.

Then you can replace 0.05 (the return for the period), and 0.5 (the fraction of a year the period represents) with references to other cells containing those two calculations.

Applying that formula to your 35 day holding produces a 130.35% compounded annualized return.
« Last Edit: November 06, 2017, 04:53:40 PM by ILikeDividends »

#### starguru

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##### Re: Fun with VIX options
« Reply #102 on: November 06, 2017, 04:51:30 PM »

I agree that annualized number is mostly fluff for the reasons you mentioned.  The only number that matters is the amount you made compared against the amount you invested.   Still, I'm perturbed that I can't get that formula to spit out the right value.  You have to search the page for the correct calculation, search for "annualized equivalent".

I'm only guessing, but I suppose you might be missing that the 1/.50 part of the article's formula is an exponent.

If you have Excel, try this formula: =POWER(1+0.05,1/0.5)-1

Using the numbers from the example, it equals 0.1025, as it should.

Then you can replace 0.05 (the return for the period), and 0.5 (the fraction of a year the period represents) with references to other cells containing those two calculations.

I entered mock values from the example and get the .1025 (or thereabouts, as it's not exactly half a year).  Im beginning to think that 365/n * p is not correct.

#### ILikeDividends

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##### Re: Fun with VIX options
« Reply #103 on: November 06, 2017, 04:59:31 PM »

I entered mock values from the example and get the .1025 (or thereabouts, as it's not exactly half a year).  Im beginning to think that 365/n * p is not correct.
You might have that backwards, though, I must admit, I'm not entirely sure what you're after with "365/n * p" in a formula about compounding.

Here's the proper formula with your actual results hard-coded:

=POWER(1+0.0833,1/(35/365))-1

Equals 1.303455093

Note: If you omit the additional parentheses I added, you'll get an incorrect result. If you replaced the bold part with a cell reference, you wouldn't need the extra parentheses.
« Last Edit: November 06, 2017, 06:12:20 PM by ILikeDividends »

#### starguru

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##### Re: Fun with VIX options
« Reply #104 on: November 06, 2017, 05:32:07 PM »

I entered mock values from the example and get the .1025 (or thereabouts, as it's not exactly half a year).  Im beginning to think that 365/n * p is not correct.
You might have that backwards, though, I must admit, I'm not entirely sure what you're after with "365/n * p".

Here's the same formula with your actual results hard-coded:

=POWER(1+0.0833,1/(35/365))-1

Equals 1.303455093

Note: If you omit the additional parentheses I added, you'll get an incorrect result. If you replaced the bold part with a cell reference, you wouldn't need the extra parentheses.

Your 130 is pretty close to my 140, the 10 probably comes from me not subtracting trading costs in both calculations (i.e. my 83 included trading costs but my 140 did not).  Neither of those is close to the 86 you get from (365/35)*8.33%=86.87%.

So which formula is correct, the one from the link or the 365/d*p?

#### ILikeDividends

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##### Re: Fun with VIX options
« Reply #105 on: November 06, 2017, 05:35:19 PM »

I entered mock values from the example and get the .1025 (or thereabouts, as it's not exactly half a year).  Im beginning to think that 365/n * p is not correct.
You might have that backwards, though, I must admit, I'm not entirely sure what you're after with "365/n * p".

Here's the same formula with your actual results hard-coded:

=POWER(1+0.0833,1/(35/365))-1

Equals 1.303455093

Note: If you omit the additional parentheses I added, you'll get an incorrect result. If you replaced the bold part with a cell reference, you wouldn't need the extra parentheses.

Your 130 is pretty close to my 140, the 10 probably comes from me not subtracting trading costs in both calculations (i.e. my 83 included trading costs but my 140 did not).  Neither of those is close to the 86 you get from (365/35)*8.33%=86.87%.

So which formula is correct, the one from the link or the 365/d*p?

They are both correct.
86.87% is the annualized return.
130.35% is the compounded annualized return.

Whichever one you want to use just depends on whether you want to calculate a compounded annual return or not.

As long as you use the same method to compare all of your results, they should yield comparable performance results.  If you want to compare with someone else's results, you need to make sure they use the same method you do.  Apples to apples.  Oranges to oranges.
« Last Edit: November 06, 2017, 05:57:52 PM by ILikeDividends »

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #106 on: November 06, 2017, 05:40:06 PM »
I bought my 15 strike Put at 9.85 when it was OTM. Now it is ITM and still not close to 9.85 (I think it is around 9.60 tops) not sure what I did wrong, but wondering if anyone has any feedback. Almost every contract was up at least a % today save for mine :(

Did you possibly pay the "ask" instead of something between the bid/ask?  Or maybe bought on a day when volatility was spiking sharply?  Or both?  This is unfortunate.  I'd consider putting in a good till canceled sell order at breakeven and trying again a little wiser next time.

#### alexpkeaton

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##### Re: Fun with VIX options
« Reply #107 on: November 06, 2017, 07:30:44 PM »
Can I just reiterate that you could pursue this exact same strategy by simply buying SVXY and let them take care of rolling options daily? I own 200 in my Roth IRA and it's up over 100% YTD. I'm now writing covered calls on half of it to reduce my exposure.

#### ChpBstrd

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##### Re: Fun with VIX options
« Reply #108 on: November 07, 2017, 07:48:38 AM »
Can I just reiterate that you could pursue this exact same strategy by simply buying SVXY and let them take care of rolling options daily? I own 200 in my Roth IRA and it's up over 100% YTD. I'm now writing covered calls on half of it to reduce my exposure.

Or buy calls / synthetic longs on SVXY if you really want to roll the dice!

#### starguru

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##### Re: Fun with VIX options
« Reply #109 on: November 07, 2017, 08:27:16 AM »
Can I just reiterate that you could pursue this exact same strategy by simply buying SVXY and let them take care of rolling options daily? I own 200 in my Roth IRA and it's up over 100% YTD. I'm now writing covered calls on half of it to reduce my exposure.

Is it the same?  For one thing there is no leverage on SVXY (from what I see).  The PUTs on UVXY seems to rely mostly on a contango effect to drive a continuous reduction in price, does SVXY have the same effect?  I'm new to this so could be (probably am) incorrect, but it seems like SVXY is designed to go the opposite direction of the VIX.  If VIX goes down SVXY goes up by the same magnitude.

#### hgjjgkj

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##### Re: Fun with VIX options
« Reply #110 on: November 07, 2017, 09:36:19 AM »
I bought my 15 strike Put at 9.85 when it was OTM. Now it is ITM and still not close to 9.85 (I think it is around 9.60 tops) not sure what I did wrong, but wondering if anyone has any feedback. Almost every contract was up at least a % today save for mine :(

Did you possibly pay the "ask" instead of something between the bid/ask?  Or maybe bought on a day when volatility was spiking sharply?  Or both?  This is unfortunate.  I'd consider putting in a good till canceled sell order at breakeven and trying again a little wiser next time.

My Order was not filling at 75% of the ask so I kept ratcheting it up. I think eventually i placed a market order and this seems like it was above ask somehow.

#### alexpkeaton

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##### Re: Fun with VIX options
« Reply #111 on: November 07, 2017, 10:18:49 AM »
Is it the same?  For one thing there is no leverage on SVXY (from what I see).  The PUTs on UVXY seems to rely mostly on a contango effect to drive a continuous reduction in price, does SVXY have the same effect?  I'm new to this so could be (probably am) incorrect, but it seems like SVXY is designed to go the opposite direction of the VIX.  If VIX goes down SVXY goes up by the same magnitude.

There's no leverage, but because of contango, SVXY naturally rises over time as it rolls options forward. In contango, the forward price is higher than the spot price, so it make a profit as the time value of the underlying contracts erodes.

Of course it all goes to hell very quickly if the market crashes. If we had another 2008-level panic I'd expect SVXY to get nearly wiped out, which is why I try to keep my position reasonably small and take profits roughly every time SVXY splits. So I buy 100 SVXY, it goes up over time, it eventually splits and I have 200 SVXY, then I sell covered calls against 100 shares until I eventually get assigned.

#### ChpBstrd

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##### Re: Fun with VIX options
« Reply #112 on: November 07, 2017, 12:28:32 PM »
SVXY's 1.39% expense ratio might be a deterrent. For every \$1,000 gambled, that's a \$14 drag - roughly two commissions a year at a mediocre online brokerage like mine.

Then again, in exchange for that high fee, you might expect to get a smoother ride and more professional execution (e.g. better exploitation of the bid/ask) than is acheivable on a DIY basis. You also get the chance to sell strategically so as to characterize your gains/losses as short or long term. Options, on the other hand, can expire inconveniently.

The ultimate investment IMO would be some sort of 10x leveraged cross synthetic long/short between VIX itself and these high-fee products. Then one could harvest the product's relative decay due to fees and/or contango at no risk. Still thinking on that one. I'll post a note from the beach if I figure it out.

#### jacquespluto

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##### Re: Fun with VIX options
« Reply #113 on: November 07, 2017, 01:00:44 PM »
Can I just reiterate that you could pursue this exact same strategy by simply buying SVXY and let them take care of rolling options daily? I own 200 in my Roth IRA and it's up over 100% YTD. I'm now writing covered calls on half of it to reduce my exposure.

I do something similar, but primarily with XIV.  The goal is to maximize the roll yield by investing in XIV when the VIX is in contango and in some cases (very rarely) VXX when the VIX is in backwardation.  I've had a lot of success with this strategy, however, it is a very small portion of my trading since the drawdowns can be very large when they happen.

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #114 on: November 07, 2017, 01:43:05 PM »
SVXY and XIV do well most of the time but suffer miserably during volatility spikes.   Because a 50% drop requires a 100% gain to break even, long these will not do as well as short VXX/UVXY.  XIV is still a 10 bagger over 7 years so it can work well if you are content to hold through really nasty price declines.  Or perhaps use a trailing stop loss.

#### jacquespluto

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##### Re: Fun with VIX options
« Reply #115 on: November 07, 2017, 02:00:58 PM »
SVXY and XIV do well most of the time but suffer miserably during volatility spikes.   Because a 50% drop requires a 100% gain to break even, long these will not do as well as short VXX/UVXY.  XIV is still a 10 bagger over 7 years so it can work well if you are content to hold through really nasty price declines.  Or perhaps use a trailing stop loss.

I basically just look at a 9 day moving average of the VXV vs. VIX.  If VXV moving average is higher than VIX, I stay in XIV.  If VXV moving average crosses below VIX moving average, I'll close position and go long VXX.

The key to this strategy is to find an amount you are comfortable trading and don't increase the size with profits due to the issue you pointed out.

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #116 on: November 07, 2017, 02:08:45 PM »
I also forgot to note that XIV has a prospectus provision to liquidate after an move greater than -80% in a day.  Presumably, SVXY could be liquidated too if it was in danger of having its NAV go negative.  Not an issue with the long futures on VXX/UVXY.

#### jacquespluto

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##### Re: Fun with VIX options
« Reply #117 on: November 07, 2017, 02:16:13 PM »
Yes, that's correct, although if that were to happen we would have much bigger issues on our hands.  Again this is a trade I put on with a small portion of my capital and routinely returns 80% + per year.  With that performance it's certainly not without risk.

I also forgot to note that XIV has a prospectus provision to liquidate after an move greater than -80% in a day.  Presumably, SVXY could be liquidated too if it was in danger of having its NAV go negative.  Not an issue with the long futures on VXX/UVXY.

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #118 on: November 07, 2017, 03:29:27 PM »
Yes, that's correct, although if that were to happen we would have much bigger issues on our hands.  Again this is a trade I put on with a small portion of my capital and routinely returns 80% + per year.  With that performance it's certainly not without risk.

I also forgot to note that XIV has a prospectus provision to liquidate after an move greater than -80% in a day.  Presumably, SVXY could be liquidated too if it was in danger of having its NAV go negative.  Not an issue with the long futures on VXX/UVXY.

Can't complain with an 80% annualized return!  Glad to hear you keep a conservative allocation size.

#### starguru

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##### Re: Fun with VIX options
« Reply #119 on: November 08, 2017, 01:43:52 PM »
Ok, I unloaded my 17 strike PUT for a sweet sweet profit of 3% (about \$30).  The good news I can now properly enter a trade that is more OTM and sell at the strike.  I have a GTC order on the Jan2019 10 Strike.  The bid/ask spread seems to be pretty tight at 5.55/5.6, so I just bid the actual bid price.  One positive thing about going more OTM is the contracts are cheaper.  Im going after 9 contracts, with trading fees of about \$10.2, which is a much better cost per contract than buying fewer contracts.

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #120 on: November 08, 2017, 01:56:12 PM »
Best of luck starguru.  Long live the UVXY short trade!

#### starguru

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##### Re: Fun with VIX options
« Reply #121 on: November 08, 2017, 02:32:55 PM »
Best of luck starguru.  Long live the UVXY short trade!

Thanx FV.  Can you remind me what you do if the B/A spread is wide?  My 17 Strike experience has taught me that it actually matters quite substantially with this trade.

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #122 on: November 08, 2017, 03:44:25 PM »
Best of luck starguru.  Long live the UVXY short trade!

Thanx FV.  Can you remind me what you do if the B/A spread is wide?  My 17 Strike experience has taught me that it actually matters quite substantially with this trade.

I usually creep up from the bid until the market has mostly just my shares at the revised bid then sit tight.  If you bid on 50 contracts at 9.85 and your NBBO updates to 4000 contracts at 9.85, that isn't like to fill.  When you update to something like say 10.05 and there are now 54 contracts at the price, you stand a good chance of getting filled by sitting tight.  The market will thus signal you when you are approaching a "fair" bid price vis-a-vis black-scholes theory.

#### starguru

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##### Re: Fun with VIX options
« Reply #123 on: November 08, 2017, 04:34:19 PM »
Best of luck starguru.  Long live the UVXY short trade!

Thanx FV.  Can you remind me what you do if the B/A spread is wide?  My 17 Strike experience has taught me that it actually matters quite substantially with this trade.

I usually creep up from the bid until the market has mostly just my shares at the revised bid then sit tight.  If you bid on 50 contracts at 9.85 and your NBBO updates to 4000 contracts at 9.85, that isn't like to fill.  When you update to something like say 10.05 and there are now 54 contracts at the price, you stand a good chance of getting filled by sitting tight.  The market will thus signal you when you are approaching a "fair" bid price vis-a-vis black-scholes theory.

What is NBBO?  Im not sure I see anything like that in Fidelity's trading window.

Another question that occurs to me (sorry :)) is what to do with profits from this strategy?  Im not using this to generate an income.  If I reinvest in the PUT then I stand a chance to lose everything.  But if i don't I can't take advantage of compounding returns.  I suppose I could put the income back into my FSTVX position....

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #124 on: November 08, 2017, 05:30:02 PM »

What is NBBO?  Im not sure I see anything like that in Fidelity's trading window.

Another question that occurs to me (sorry :)) is what to do with profits from this strategy?  Im not using this to generate an income.  If I reinvest in the PUT then I stand a chance to lose everything.  But if i don't I can't take advantage of compounding returns.  I suppose I could put the income back into my FSTVX position....

I think its Next Best Bid (or) Offer.  It's been awhile.  Most brokers show the current bid/ask along with the number of contracts at those prices.

I allocate 10% of my portfolio to this strategy.  Thus, my investment plus 10% of my gains go into the next series of puts.  The rest is invested based on my allocation targets.  For me, that is 40% fixed/variable "income" investments such as bond funds and preferred funds.  The rest goes to high yield equity and miscellaneous options writing for income.  Basically, if you have a investor policy statement, you should consult it for what to do with profits.

#### starguru

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##### Re: Fun with VIX options
« Reply #125 on: November 09, 2017, 06:19:44 AM »
Interesting.  UVXY is spiking in pre market trading.  Does anyone know why?  I got extremely lucky in that my order to buy the 10 strike options didn’t fill and was limited to the day.  Buying opportunity or warning to stay out?

Sent from my iPhone using Tapatalk

#### ChpBstrd

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##### Re: Fun with VIX options
« Reply #126 on: November 09, 2017, 08:05:02 AM »
Interesting.  UVXY is spiking in pre market trading.  Does anyone know why?  I got extremely lucky in that my order to buy the 10 strike options didnt fill and was limited to the day.  Buying opportunity or warning to stay out?

Sent from my iPhone using Tapatalk

I vote opportunity. In the past, deviations from the trendline have been corrected with a fast subsequent move downward. If this was a company, I would be talking technical analysis BS in pointing out this trend. However, with UVXY, there's something mathematical at work. E.g. when the futures spread tightens, arbitration springs it back. UVXY's trading strategy creates the decay you're betting on, and the market movement is noise in the long run.

#### hodedofome

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##### Re: Fun with VIX options
« Reply #127 on: November 09, 2017, 12:08:56 PM »
I have been outright shorting VXX for over a year now, adding to my short on spikes in volatility. I try to keep my position no larger than 10% of my trading account. Backtesting my strategy using VIX futures data to 2004 has resulted in CAGR of over 40%, however drawdowns can be horrendous.

I've been considering switching over to buying puts like Velociraptor however. Buying XIV has the risk of the fund shutting down completely and everyone losing their money if volatility spikes enough. I read one analysis that another black monday like 1987 could cause the fund to shut down. Shorting VXX during a huge spike could cause a margin call for me, even though I keep it around 10% of my account VXX would have spiked 500-600% during the financial crisis.

Buying puts at least caps the downside, if I lost 100% of the trade I could still cap my loss at 10% of my account if I so desired.

#### jacquespluto

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##### Re: Fun with VIX options
« Reply #128 on: November 09, 2017, 01:30:06 PM »
You mention that you don't trade XIV due to the 80% rule where the fund could close in a crazy black swan / world ending type of event.  If that were to happen (which many argue is nearly impossible), you would still be left with 20%.  Much better than a margin call and possibly owing more money than you originally invested by shorting VXX through the same event.

So you aren't willing to lose 80% of lets say 10% of your capital in a crazy black swan event, but your current trade could lose more than 100% and end up owing your broker.  You also then go on to say that you would be willing to lose 100% trading puts if you are using 10% of capital.  I'm a little confused.

I have been outright shorting VXX for over a year now, adding to my short on spikes in volatility. I try to keep my position no larger than 10% of my trading account. Backtesting my strategy using VIX futures data to 2004 has resulted in CAGR of over 40%, however drawdowns can be horrendous.

I've been considering switching over to buying puts like Velociraptor however. Buying XIV has the risk of the fund shutting down completely and everyone losing their money if volatility spikes enough. I read one analysis that another black monday like 1987 could cause the fund to shut down. Shorting VXX during a huge spike could cause a margin call for me, even though I keep it around 10% of my account VXX would have spiked 500-600% during the financial crisis.

Buying puts at least caps the downside, if I lost 100% of the trade I could still cap my loss at 10% of my account if I so desired.

#### ILikeDividends

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##### Re: Fun with VIX options
« Reply #129 on: November 09, 2017, 02:02:34 PM »
Interesting.  UVXY is spiking in pre market trading.  Does anyone know why?  I got extremely lucky in that my order to buy the 10 strike options didnt fill and was limited to the day.  Buying opportunity or warning to stay out?

Sent from my iPhone using Tapatalk

I vote opportunity. In the past, deviations from the trendline have been corrected with a fast subsequent move downward. If this was a company, I would be talking technical analysis BS in pointing out this trend. However, with UVXY, there's something mathematical at work. E.g. when the futures spread tightens, arbitration springs it back. UVXY's trading strategy creates the decay you're betting on, and the market movement is noise in the long run.
One thing distinguishing put buying against the UVXY from put buying against a "real" company, is that when UVXY spikes, it's because volatility spiked.  When a real company's stock goes up, you would expect volatility to be falling, making options cheaper to buy.  By definition, a rising UVXY suggests an inflated pricing of the put options because of higher volatility.  Seemingly not an ideal scenario for an option buyer.

It's not clear to me that a spike in UVXY represents such an obvious opportunity when buying puts.  Once you buy those puts, and once volatility settles down again, one would expect some deflation in the value of those puts working counter to the increase of value as it comes closer to the money.  Kind of like a tug of war between competing forces in valuing the option. It's not obvious to me which force would prevail, in the short term. It is indeed an interesting question.
« Last Edit: November 09, 2017, 06:20:20 PM by ILikeDividends »

#### hodedofome

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##### Re: Fun with VIX options
« Reply #130 on: November 09, 2017, 02:04:57 PM »
You mention that you don't trade XIV due to the 80% rule where the fund could close in a crazy black swan / world ending type of event.  If that were to happen (which many argue is nearly impossible), you would still be left with 20%.  Much better than a margin call and possibly owing more money than you originally invested by shorting VXX through the same event.

So you aren't willing to lose 80% of lets say 10% of your capital in a crazy black swan event, but your current trade could lose more than 100% and end up owing your broker.  You also then go on to say that you would be willing to lose 100% trading puts if you are using 10% of capital.  I'm a little confused.

Doesn't have to be a world ending event. I said 1987 has been estimated to have wiped out XIV.

Margin call would suck but all it would mean is that I need to come up with the money elsewhere to keep my position.

The worst I could lose buying puts is 100% of my position, if my position is 10% of my account then that means I lose 10% of my capital.

#### starguru

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##### Re: Fun with VIX options
« Reply #131 on: November 09, 2017, 02:20:40 PM »
You mention that you don't trade XIV due to the 80% rule where the fund could close in a crazy black swan / world ending type of event.  If that were to happen (which many argue is nearly impossible), you would still be left with 20%.  Much better than a margin call and possibly owing more money than you originally invested by shorting VXX through the same event.

So you aren't willing to lose 80% of lets say 10% of your capital in a crazy black swan event, but your current trade could lose more than 100% and end up owing your broker.  You also then go on to say that you would be willing to lose 100% trading puts if you are using 10% of capital.  I'm a little confused.

Doesn't have to be a world ending event. I said 1987 has been estimated to have wiped out XIV.

Margin call would suck but all it would mean is that I need to come up with the money elsewhere to keep my position.

The worst I could lose buying puts is 100% of my position, if my position is 10% of my account then that means I lose 10% of my capital.

Right, but if XIV is only 10% of your portfolio then the most your risk is 10% even if XIV gets wiped out.

#### starguru

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##### Re: Fun with VIX options
« Reply #132 on: November 09, 2017, 02:25:08 PM »
Interesting.  UVXY is spiking in pre market trading.  Does anyone know why?  I got extremely lucky in that my order to buy the 10 strike options didnt fill and was limited to the day.  Buying opportunity or warning to stay out?

Sent from my iPhone using Tapatalk

I vote opportunity. In the past, deviations from the trendline have been corrected with a fast subsequent move downward. If this was a company, I would be talking technical analysis BS in pointing out this trend. However, with UVXY, there's something mathematical at work. E.g. when the futures spread tightens, arbitration springs it back. UVXY's trading strategy creates the decay you're betting on, and the market movement is noise in the long run.
One thing distinguishing put buying against the UVXY from put buying against a "real" company, is that when UVXY spikes, it's because volatility spiked.  By definition, this suggests an inflated pricing of the put options because of higher volatility.

It's not clear to me that a spike in UVXY represents such an obvious opportunity when buying puts.  Once you buy those puts, and once volatility settles down again, one would expect some deflation in the value of those puts working counter to the increase of value as it comes closer to the money.  Kind of like a tug of war in valuing the option. It's not obvious which force would prevail, in the short term. It is indeed an interesting question.

Either way I bought my \$10 strike contracts at my ask at one point when UVXY spiked during the day.  It appears to have settled down in the afternoon.  Wonder if the carnage will continue tomorrow.

#### jacquespluto

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##### Re: Fun with VIX options
« Reply #133 on: November 09, 2017, 03:19:35 PM »
Yes, Starguru, that was my point.  I just didn't understand the post since either way you could lose 100% of the 10% you have allocated to this strategy -  so doesn't make sense singling out XIV as a bad option.

In the case of shorting VXX you could lose more than 100%, so IMO that is the worst of the 3 strategies.  I've seen people blow up their accounts shorting stocks and actually end up owing more money.  Brokers don't care, they will just liquidate everything in your account with a bad margin call and it will be at pennies on the dollar (in case of a black swan) unless you have a really powerful hedge in place.  Regardless, there is no floor with shorting something like VXX in the case of a black swan.

With puts on UVXY or long XIV you can only lose 100%, no more.  So you just need to be comfortable with the % allocated to the strategy.  With XIV, you may even salvage 20% of your investment according to the prospectus.

"...you will receive a cash payment in an amount (the "Accelerated Redemption Amount") equal to the Closing Indicative Value on the Accelerated Valuation Date."

You mention that you don't trade XIV due to the 80% rule where the fund could close in a crazy black swan / world ending type of event.  If that were to happen (which many argue is nearly impossible), you would still be left with 20%.  Much better than a margin call and possibly owing more money than you originally invested by shorting VXX through the same event.

So you aren't willing to lose 80% of lets say 10% of your capital in a crazy black swan event, but your current trade could lose more than 100% and end up owing your broker.  You also then go on to say that you would be willing to lose 100% trading puts if you are using 10% of capital.  I'm a little confused.

Doesn't have to be a world ending event. I said 1987 has been estimated to have wiped out XIV.

Margin call would suck but all it would mean is that I need to come up with the money elsewhere to keep my position.

The worst I could lose buying puts is 100% of my position, if my position is 10% of my account then that means I lose 10% of my capital.

Right, but if XIV is only 10% of your portfolio then the most your risk is 10% even if XIV gets wiped out.

#### ChpBstrd

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##### Re: Fun with VIX options
« Reply #134 on: November 09, 2017, 06:35:03 PM »
Interesting.  UVXY is spiking in pre market trading.  Does anyone know why?  I got extremely lucky in that my order to buy the 10 strike options didnt fill and was limited to the day.  Buying opportunity or warning to stay out?

Sent from my iPhone using Tapatalk

I vote opportunity. In the past, deviations from the trendline have been corrected with a fast subsequent move downward. If this was a company, I would be talking technical analysis BS in pointing out this trend. However, with UVXY, there's something mathematical at work. E.g. when the futures spread tightens, arbitration springs it back. UVXY's trading strategy creates the decay you're betting on, and the market movement is noise in the long run.
One thing distinguishing put buying against the UVXY from put buying against a "real" company, is that when UVXY spikes, it's because volatility spiked.  When a real company's stock goes up, you would expect volatility to be falling, making options cheaper to buy.  By definition, a rising UVXY suggests an inflated pricing of the put options because of higher volatility.  Seemingly not an ideal scenario for an option buyer.

It's not clear to me that a spike in UVXY represents such an obvious opportunity when buying puts.  Once you buy those puts, and once volatility settles down again, one would expect some deflation in the value of those puts working counter to the increase of value as it comes closer to the money.  Kind of like a tug of war between competing forces in valuing the option. It's not obvious to me which force would prevail, in the short term. It is indeed an interesting question.
I've been trying to figure this paradox out for a while, buying a few strikes at a couple timeframes. Rising market volatility causes the underlying UVXY to rise, which is a factor causing puts to decline. However, increasing volatility of UVXY is a factor causing both puts and calls to increase in value.

My results are confounding. On a daily basis, some of my puts will be up and some will be down, as quoted based on bid prices. There are two reasons for this:

1) Bid-ask spreads expand and contract unpredictably. One day it might be a 4 cent spread and the next day a 15 cent spread. If your quote is the bid price, your quote reflects a lot of this noise.

2) For a shorter-duration put, the movement of the underlying will have a bigger effect. For a longer-duration put, the change in UVXY's volatility will have a bigger effect. The longer-duration puts offer a "smoother ride" because their decline in response to a UVXY spike is offset to a greater degree by an increase in UVXY's implied volatility. For the same reason, buying UVXY puts right after a big volatility move might disappoint, because the decline in implied volatility when things return to normal will offset much of the gains from UVXY's decline. Thus, I view volatility events as a safer time to buy puts, not a home run opportunity.

#### ILikeDividends

• Bristles
• Posts: 445
##### Re: Fun with VIX options
« Reply #135 on: November 09, 2017, 07:06:42 PM »
I've been trying to figure this paradox out for a while, buying a few strikes at a couple timeframes. Rising market volatility causes the underlying UVXY to rise, which is a factor causing puts to decline. However, increasing volatility of UVXY is a factor causing both puts and calls to increase in value.

My results are confounding. On a daily basis, some of my puts will be up and some will be down, as quoted based on bid prices. There are two reasons for this:

1) Bid-ask spreads expand and contract unpredictably. One day it might be a 4 cent spread and the next day a 15 cent spread. If your quote is the bid price, your quote reflects a lot of this noise.

2) For a shorter-duration put, the movement of the underlying will have a bigger effect. For a longer-duration put, the change in UVXY's volatility will have a bigger effect. The longer-duration puts offer a "smoother ride" because their decline in response to a UVXY spike is offset to a greater degree by an increase in UVXY's implied volatility. For the same reason, buying UVXY puts right after a big volatility move might disappoint, because the decline in implied volatility when things return to normal will offset much of the gains from UVXY's decline. Thus, I view volatility events as a safer time to buy puts, not a home run opportunity.
I'm not in this trade yet.  I'm waiting for the 2020's to come out.  But I've been watching it intently for the last few days.  The ask for the near ATM 15 strike for the 2019's yesterday bounced between 9.50 and 9.55 all day long.  Today, nearly a dollar higher on UVXY's ticker today, the ask was pretty much stuck at 9.55, with only a few brief departures back to 9.50.  The swings in the bid, on both days, was much larger, about 35 cents or so.

With a ~\$1 move in the underlying, I was understandably a bit surprised to see so little movement in the bid/ask from one day to the next.  Sure, 2 days is (admittedly) statistically a tiny sample set, but it seemed as if the VIX was being used in the implied volatility part of the pricing mechanism, rather than the implied volatility of UVXY itself.  ??

Even more anecdotally, yesterday, after a quick sharp drop in UVXY, the 9.40 bids for the same put literally evaporated into thin air, instantly, with no trades, only to be replaced by a 9.20 bid; which is exactly the opposite of what I would expect if the VIX were being used to price the options. Confounding indeed.
« Last Edit: November 09, 2017, 08:05:11 PM by ILikeDividends »

#### ChpBstrd

• Handlebar Stache
• Posts: 1312
##### Re: Fun with VIX options
« Reply #136 on: November 10, 2017, 08:16:16 AM »
I've been trying to figure this paradox out for a while, buying a few strikes at a couple timeframes. Rising market volatility causes the underlying UVXY to rise, which is a factor causing puts to decline. However, increasing volatility of UVXY is a factor causing both puts and calls to increase in value.

My results are confounding. On a daily basis, some of my puts will be up and some will be down, as quoted based on bid prices. There are two reasons for this:

1) Bid-ask spreads expand and contract unpredictably. One day it might be a 4 cent spread and the next day a 15 cent spread. If your quote is the bid price, your quote reflects a lot of this noise.

2) For a shorter-duration put, the movement of the underlying will have a bigger effect. For a longer-duration put, the change in UVXY's volatility will have a bigger effect. The longer-duration puts offer a "smoother ride" because their decline in response to a UVXY spike is offset to a greater degree by an increase in UVXY's implied volatility. For the same reason, buying UVXY puts right after a big volatility move might disappoint, because the decline in implied volatility when things return to normal will offset much of the gains from UVXY's decline. Thus, I view volatility events as a safer time to buy puts, not a home run opportunity.
I'm not in this trade yet.  I'm waiting for the 2020's to come out.  But I've been watching it intently for the last few days.  The ask for the near ATM 15 strike for the 2019's yesterday bounced between 9.50 and 9.55 all day long.  Today, nearly a dollar higher on UVXY's ticker today, the ask was pretty much stuck at 9.55, with only a few brief departures back to 9.50.  The swings in the bid, on both days, was much larger, about 35 cents or so.

With a ~\$1 move in the underlying, I was understandably a bit surprised to see so little movement in the bid/ask from one day to the next.  Sure, 2 days is (admittedly) statistically a tiny sample set, but it seemed as if the VIX was being used in the implied volatility part of the pricing mechanism, rather than the implied volatility of UVXY itself.  ??

Even more anecdotally, yesterday, after a quick sharp drop in UVXY, the 9.40 bids for the same put literally evaporated into thin air, instantly, with no trades, only to be replaced by a 9.20 bid; which is exactly the opposite of what I would expect if the VIX were being used to price the options. Confounding indeed.

I think most of us are unused to owning long options positions with 1+ years duration. People usually think in terms of options with a couple weeks or maybe a month left, and these can be very volatile indeed with double-digit % swings in response to single-digit % changes in the underlying. The delta on long-term options is much lower though, because volatility plays a bigger role. E.g. the delta on some of mine is 13 cents for every dollar move in UVXY. Instead of a wild ride, we get the daily movement of IBM stock or something, with only an elastic connection to the underlying. Velociraptor's attitude - to make this trade with long-term options, roll as they approach ATM, and hold for the long run - is catching on with me. It helps that he's making a living doing it. :)

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #137 on: November 10, 2017, 12:37:18 PM »
I'm not in this trade yet.  I'm waiting for the 2020's to come out.

Note that when the 2020's come out, the bid/ask will be VERY wide for a few days to a few weeks.  I don't know why this is but each year, the initial pricing is completely nonsensical with piss poor liquidity.

#### ILikeDividends

• Bristles
• Posts: 445
##### Re: Fun with VIX options
« Reply #138 on: November 10, 2017, 01:14:50 PM »
I'm not in this trade yet.  I'm waiting for the 2020's to come out.

Note that when the 2020's come out, the bid/ask will be VERY wide for a few days to a few weeks.  I don't know why this is but each year, the initial pricing is completely nonsensical with piss poor liquidity.
Thanks for the head's up.  I won't rush it.

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #139 on: November 10, 2017, 01:56:21 PM »
FYI, I found the data on when the LEAPS are issued.  Seems they are issued at three separate dates, depending on which options cycle the security is on.  (UVXY is on cycle 3).

"Cycle 1: Monday, September 11th, 2017: January 2020 LEAPSŪ listed

Cycle 2: Monday, October 16th, 2017: January 2020 LEAPSŪ listed

Cycle 3: Monday, November 13th, 2017: January 2020 LEAPSŪ listed"

So expect to see the new series issued on Monday with wacky pricing for a few days.  Should be able to get a "good" fill by the 20th.

#### MustachioedPistachio

• Posts: 96
• Location: Memphis, TN
##### Re: Fun with VIX options
« Reply #140 on: November 10, 2017, 04:36:20 PM »
I'd like to chime in also thanking everyone for sharing their experiences! Once my IB account is funded, I'll post as well.

I whipped up this spreadsheet to help wrap my head around appropriate strike prices relative to decay of the underlying. Maybe it'll help some of you too!

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #141 on: November 10, 2017, 04:46:40 PM »
I'd like to chime in also thanking everyone for sharing their experiences! Once my IB account is funded, I'll post as well.

I whipped up this spreadsheet to help wrap my head around appropriate strike prices relative to decay of the underlying. Maybe it'll help some of you too!

Can you make it clear with text which expiry the bottom table is referring to?  I assume that is the longest dated available LEAP expiry (Jan).  Or I have it completely wrong and the table is expiry agnostic and is driven by time versus current price of underlying?

Thanks.

#### MustachioedPistachio

• Posts: 96
• Location: Memphis, TN
##### Re: Fun with VIX options
« Reply #142 on: November 10, 2017, 11:10:37 PM »
Thanks! I put a comment in the spreadsheet to reflect that...
the table is expiry agnostic and is driven by time versus current price of underlying.
After a volatility spike, how long does it typically take for premiums to deflate to "normal"? Do they tend to gradually stabilize or decelerate a bit too quickly and then bounce back to normal? Plump one day then business as usual the next? YMMV?

Thanks again!

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #143 on: November 11, 2017, 08:06:13 AM »
Thanks! I put a comment in the spreadsheet to reflect that...
the table is expiry agnostic and is driven by time versus current price of underlying.
After a volatility spike, how long does it typically take for premiums to deflate to "normal"? Do they tend to gradually stabilize or decelerate a bit too quickly and then bounce back to normal? Plump one day then business as usual the next? YMMV?

Thanks again!

It depends on how big the spike is.  A 7-8% downward move in the S&P usually returns to the starting point in about a month.  Or the market for ^VIX futures can do something completely unexpected and "irrational".  Remember, the futures prices reflects not just today's market action but the expectations of futures buyers and sellers for the 14 to 40 day future.  If there is rampant euphoria or pessimism, the futures can move counter to the broad market.  But over long periods of time, the futures ultimately track the inverse of the S&P.

#### hgjjgkj

• Stubble
• Posts: 154
##### Re: Fun with VIX options
« Reply #144 on: November 11, 2017, 03:40:41 PM »
Thanks! I put a comment in the spreadsheet to reflect that...
the table is expiry agnostic and is driven by time versus current price of underlying.
After a volatility spike, how long does it typically take for premiums to deflate to "normal"? Do they tend to gradually stabilize or decelerate a bit too quickly and then bounce back to normal? Plump one day then business as usual the next? YMMV?

Thanks again!

It depends on how big the spike is.  A 7-8% downward move in the S&P usually returns to the starting point in about a month.  Or the market for ^VIX futures can do something completely unexpected and "irrational".  Remember, the futures prices reflects not just today's market action but the expectations of futures buyers and sellers for the 14 to 40 day future.  If there is rampant euphoria or pessimism, the futures can move counter to the broad market.  But over long periods of time, the futures ultimately track the inverse of the S&P.

Is there an Impl Vol value or relationship you use to guide when to buy? For example the 2019 \$15 strike as imp vol of 1.19 right now. Not sure where to get historical data on this but that seems high. http://www.nasdaq.com/symbol/uvxy/option-chain/190118P00015000-uvxy-put  If you buy after a big move, I think you could get vol crushed. I tried to guard against this but maybe it happened on my 9.85 puts

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #145 on: November 11, 2017, 05:13:39 PM »

Is there an Impl Vol value or relationship you use to guide when to buy? For example the 2019 \$15 strike as imp vol of 1.19 right now. Not sure where to get historical data on this but that seems high. http://www.nasdaq.com/symbol/uvxy/option-chain/190118P00015000-uvxy-put  If you buy after a big move, I think you could get vol crushed. I tried to guard against this but maybe it happened on my 9.85 puts

Once you are established and selling at a predetermined price, you will always be selling/rolling on a quiet day in the market.  Making moves at low vol is self reinforcing.

#### hgjjgkj

• Stubble
• Posts: 154
##### Re: Fun with VIX options
« Reply #146 on: November 11, 2017, 07:27:17 PM »

Is there an Impl Vol value or relationship you use to guide when to buy? For example the 2019 \$15 strike as imp vol of 1.19 right now. Not sure where to get historical data on this but that seems high. http://www.nasdaq.com/symbol/uvxy/option-chain/190118P00015000-uvxy-put  If you buy after a big move, I think you could get vol crushed. I tried to guard against this but maybe it happened on my 9.85 puts

Once you are established and selling at a predetermined price, you will always be selling/rolling on a quiet day in the market.  Making moves at low vol is self reinforcing.

Sorry this may be a dumb question but if you are rolling during low vol aren't you selling on days where you lost money?

#### Financial.Velociraptor

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##### Re: Fun with VIX options
« Reply #147 on: November 12, 2017, 05:45:55 PM »

Sorry this may be a dumb question but if you are rolling during low vol aren't you selling on days where you lost money?

Low vol days tend to be associated with up days in the market.  E.g. VIX and UVXY fall and UVXY puts rise.  It is somewhat counter-intuitive but you get used to it.

#### sieben

• Stubble
• Posts: 116
• Age: 28
##### Re: Fun with VIX options
« Reply #148 on: November 14, 2017, 06:38:25 PM »
Hey Financial.Velociraptor,

I've been spending some time on your blog and watching your posts here on MMM.
I'm very curious about your investing approach, but for some reason my brain seems to have a hard time wrapping around the terminology and everything you are talking about.
I'm not going to even try to get involved until I have a better understanding. I was wondering if you had any books/online resources you could point me too that might help me figure this out.

Thanks so much :)

#### Financial.Velociraptor

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