I’ve gotten some questions about these and the way some of us sell them. I’ll give some answers here, and then I encourage anyone to ask further questions so the group can answer. Also, those experienced with trading these, please add to this post with your comments…

These both are based on $VXX, which is the “VIX Short-Term Futures ETN” that tracks $VIX futures contracts. It is infected by contango under normal market conditions, meaning over the long term it is always headed down (I will cover this phenomenon in next week’s webinar). But during volatile markets, in can have dramatic spikes up.

The $UVXY is an ETF that seeks to return 2x the VXX move on a DAILY basis. Because UVXY is two-times the VXX, the downward pressure over time is greater in UVXY than VXX, but the up spikes can be much larger.

The $SVXY is the 1x inverse of the VXX. The inverse aspect would indicate a general uptrend overtime, however, over the last 16 months, the SVXY has been under performing and can be slow in reaching new highs.

Most traders here predominantly SELL volatility when the VIX and VXX spike higher, and thus profit when volatility settles down. The most common methods are to sell UVXY calls and sell SVXY puts. Some also sell VXX calls, or sell spreads. But most of us sell these naked. All of us have reaped very strong profits from this strategy over the last 4 to 5 years. The difficult part is when we get into a correction and many positions sold on initial vol spikes go underwater. You need to control your position size and roll options when necessary so your account does not blow up during these times. ALSO, you must be leery if we are entering a bear market. None of these products existed in 2008, so no one really knows how they will perform in another financial crash or an extended downtrend. Personally, I have been more cautious lately with these products for this reason.

What works for me best is to sell near term way OTM strikes that are very unlikely to get hit. Last week I was selling UVXY Jan 100 to 125 calls for .30 or so each. As you can see, since then UVXY has only moved from 30 to 50. Also, I sell highest strikes at the furthest expiration dates, like Jan 2017 and 2018. These will return pretty high premium, but will deflate dramatically when volatility relaxes. Many traders will add strikes from all expirations, including weekly, and at multiple strikes.

We also will take assignment of SVXY stock, sometimes UVXY stock, and sell covered calls until stock is called away. Some of us will hold these positions through large drawdowns, knowing the volatility event will eventually end. I do not recommend that unless you have ice in your veins. We also sell naked PUTS in UVXY, especially in times like now when rallies like yesterday are usually followed by more volatility. Check out the long list of expirations that will be posted at the end of the day, and you’ll get an idea of some of the positions that are being traded.

Hope this helps! The traders here are all very helpful and can answer further questions. – Jeff