It’s been a crazy month so far but it has given us a great opportunity to observe the “new” UVXY and how it reacts during market turmoil. The timing has been great since it had it’s most recent split just two weeks before the craziness began. I don’t have any data to back this up but just going by feel and how it’s suppose to trade now it does seem that it’s moves haven’t been as violent as they were previously so the adjustment appears to be working. No guarantees of course. It could be trading at 150 before things calm down but it does seem unlikely.
After the spike of the summer of 2015 I have been almost exclusively shorting it by selling call spreads on spikes or splits. It’s worked but they are slow to profit since they are so far out in time and don’t decay quite as fast since they are sold closer to the money. It works but it requires the risk to be on the table for a long time tying up buying power.
With the “new and improved” UVXY I think there’s a better way. I am switching all of my short UVXY positions to the #LongPuts #LEAPS strategy. With UVXY being toned down a little we will still get the inevitable downward trend but possibly not quite as fast as before. This should allow more time to sell weekly positions against the long puts for basis reduction. With less violent spikes and slower decay the sales should be possible on both calls and puts.
With all that said, let’s look at some real world numbers. I’ll use my original position as an example.
When UVXY made it’s initial run into the 50’s I bought Jan 2021 50 strike puts. This was just 9 days ago and I paid 29.60 for them. Let’s round that to 30 for simplicity.
I feel it’s safe to assume that by Jan 2021 UVXY will be somewhere near a split adjusted price of 5 dollars. That’s a 45 dollar drop so with the 30 dollar purchase price of the puts there should be a 15 dollar gain there if nothing more is done but sit and wait.
Now let’s add the possibilities of some weekly sales. In 9 days I’ve already brought in 6 dollars of weekly sales using puts and calls. That will go straight to the bottom line of the 2021 position. Of course that type of premium won’t always be available. Some rolling will be required or sometimes the call sale risk will be too high during low volatility.
Let’s assume very conservatively that over the course of the trade an average of 50 cents per week per side can be brought in. That’s a dollar per week for 116 weeks. 116 dollars plus the 15 dollar gain on the put purchase could turn this into about a 130 dollar gain on each contract.
The beautiful thing about it is the only big chunk of buying power being used is the original cost of the long puts but a good part of that can be made up early in the trade before UVXY drops much. Premium available for weekly sales is pretty nice until UVXY falls into the low teens and it begins drying up.
I tried a strategy similar to this on the split before this most recent one. It turned out to be nicely profitable and I was only selling the put side against the position…and UVXY dropped so quickly I didn’t get too many of those sold. With a toned down product now I’m thinking this will work much better this time around. We’ll see!
So today I closed all of my pre-split call spreads at overall profits. This takes a lot of risk off the table and frees up buying power for the new UVXY strategy. I’m still holding a few post split spreads but looking to get out of those at close to even eventually.
Bought to Close UVXY2 DEC 21 2018 15.0/25.0 Bear Call Spreads @ .99 (sold for .84) loss
Bought to Close UVXY2 DEC 21 2018 20.0/30.0 Bear Call Spreads @ .55 (sold for .86) gain
Bought to Close UVXY2 DEC 21 2018 20.0/30.0 Bear Call Spreads @ .52 (sold for .85) gain
Bought to Close UVXY2 JAN 18 2019 12.0/17.0 Bear Call Spreads @ 1.10 (sold for 1.15) gain
Bought to Close UVXY2 JAN 18 2019 15.0/25.0 Bear Call Spreads @ 1.16 (sold for .99) loss
Bought to Close UVXY2 JAN 18 2019 20.0/30.0 Bear Call Spreads @ .65 (sold for .91) gain