NaughtyPines
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TRADE IDEA: UVXY -- TIME TO LOOK AT LEAPS?

AMEX:UVXY   PROSHARES TRUST ULTRA VIX SHORT TERM FUTURES ETF
It's not often that I play leaps or think of myself as "playing leaps." In case you're wondering, a "leaps" is a "long term equity anticipation security" -- basically, a long-dated option. My most frequent use of them is in my individual retirement account where I'm working a covered call, want to hold onto the underlying for dividend generation, but also want to use the short call leaps as a capital preservation tool and push it out far out in time to decrease the likelihood of my shares being called away.

Here, they serve a different purpose in these particular underlyings ( UVXY             , VXX             ) -- namely to take advantage of a short-term pop in volatility (which were infrequent over the past year) without getting caught up in short-term gyrations volatility may experience that may make shorter term setups frustrating because they run out of time for volatility to mean revert and/or experience significant contango erosion or beta slippage (I have a few of those on that are, at best, "troubled" here).

Traditionally, I have seen two approaches to these long-dated setups intended to take advantage of occasional short-term pops: (1) setups that calculate the approximate erosion/beta slippage the underlying will experience on average over the life of the setup and then sells a credit spread or buys a debit spread at or near the strike at which the price of the underlying is likely to settle toward the end of the option's life; and (2) at-the-money setups.

Since a lot of different things can happen during the life of an option such that the average contango erosion or beta slippage is monkeyed with -- making an approximation of where price will potentially settle a less than accurate endeavor, I'm going with the latter type of setup here -- buying an at the money debit spread, with the spread straddling current price (i.e., the long above, the short below). A few tips ... .

(1) Since the UVXY             leaps aren't the most liquid things in the world, a fill will require a touch of price discovery, so I will start with trying to get a fill for 50% of the width of the spread (hey, we can all dream, can't we) and then adjust the fill price to see if I can get a fill for no less than one-third the width of the spread.

(2) This isn't a setup for the impatient. It's a set and forget. With that in mind, keep the spread width and/or number of contracts small such that the buying power effect relative to your account size is within your risk parameters and leaves you with plenty of dry powder to take advantage of further pops in volatility (they may have been infrequent over the past year, but they happen).

(3) Give some thought as to how wide you want to go with the spread. Going extremely narrow may, in essence, prevent you from "squeezing in" additional spreads in the particular leaps expiry you're using. If I put on the example shown here, I won't be able to buy 14/15 debit spreads going forward, since selling 14 short legs will close out the 14 longs of the 13/14's, so going wider with the spread and using fewer contracts may give you greater flexibility to use this expiry for further setups going forward. That being said, I can always sell 13/14 short call verticals in the futures without "stepping on" the 13/14 long put verticals, if I choose to go narrow with the debit spread.

(4) Early on, the ride could be "rough." High volatility environments tend to have a short life, but that doesn't mean that higher volatility can't last longer than it's comfortable for you as a trader or that any given period of time doesn't have the potential to do things that aren't "average" in nature of what we've experienced since February of 2016 (winner, winner, chicken dinner for short volatility ... ).
Bình luận: These appear to be extremely tough to fill as a spread at >30% ROC, so you'd have to leg in -- the long first, after which you would wait for an opportunity to add the short ... .
I have added to VXX June and September verticals... Looking at January now. I have some in March and April, but I've pretty much written those off. Concerned that a fundamental repricing in vol ETPs may be underway and that June and September are in danger. May roll out when / if the market shows its hand in the coming weeks. I also have some verticals in UVXY; about half as many.

Lot's of dry powder. Not ready to give up on the strategy yet despite all the CFAs in FinTwit proclaiming the end of the "short vol trade". I still believe that these ETPs will continue to decay over time and should return to "normal" in a few months, presuming we are in the midst of a correction within a bull market structure.
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NaughtyPines Jaymanicus
@Jaymanicus, It's been somewhat brutal. The whole /VX term structure is in backwardation and needs to adjust/lift upward to accommodate current VIX pricing ... . When we return to the normal "contango look," it may become a decent trade again.
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Jaymanicus NaughtyPines
@NaughtyPines, I assume you're still in the JAN 19 UVXY spread? I think that has a decent shot at these price levels. VXX as well.
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NaughtyPines Jaymanicus
@Jaymanicus, I'd have to check. It's a bit of a spaghetti works in my account with the short vol trade ... .
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With a good fill looks good. If vol settles down again a reverse split could sink it?
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NaughtyPines Tom1trader
@Tom1trader, I'm just going to stick a spread out there with the long leg at current price, the short below, look for a 50% width fill, see what happens. Rev split will actually occur around 8-ish, so it's got a ways to go. Was close at the all time low ... .
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Tom1trader NaughtyPines
@NaughtyPines, Starting to look like things will stay unsettled, guess with the interest/10y yield stuff - I would watch Proshares news closely. I still have some VXX positions open - have moved the profitable legs up to minimum width and will see what happens.
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NaughtyPines Tom1trader
@Tom1trader, A bit of a rough ride ... . Could be several weeks before the term structure returns to its normal "look." It's in full on backwardation now ... .
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Tom1trader NaughtyPines
@NaughtyPines, Anyhow on the leaps spread, if it goes back to most of the time contango should be good to go, fill looks like might be spooky but never can tell about that part until the order is out there. Good luck with it/will look at it more myself.
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NaughtyPines Tom1trader
@Tom1trader, I putzed a little bit today just to see ... . Spreads are wide, so it's the old just stick it out there at the fill price you want and see if it fills, but it would be nice to know what to shoot for. Shorter term, I've been shooting for ~2.30 for the three wides (30% ROC), ~1.50 for the twos (33% ROC). Just can't seem to squeeze a whole lotta more out of those ... .
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