iPath Series B S&P 500 VIX Short-Term Futures ETNArca
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... for a 2.23/contract debit.
Max Profit: 77/contract Max Loss: 223/contract Break Even: 26.27
Notes: My standard Thursday or Friday weekly expiry play. You can probably still get a fill in the neighborhood of 2.25 (or .75 credit for a short call vert) if it doesn't move much come Friday open. Will look to take it off for >15% of what I put it on for ... .
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Now that we've had a little pop where I've added in some spreads with better strikes, I'll shoot to take these off for scratch, since they're my most "at risk" spreads.
Curious about a few things with this trade. First, why not move the short strike lower to improve your risk-reward ratio? I realize this might move the B/E point below the current market, but it also reduces your total risk and increases your max payout for the same number of contracts, no? For example, strikes 27 and 24 for a max profit of 107 and max risk of 193. The debit is around 1.92. The OI at 1000 on 11 January at these strikes was decent for a smallish fill.
Also, how do you manage shorter duration trades like this one -- with 50 DTE (anything less than 90d for me) -- when volatility rises at the wrong time? For example, less than 21 DTE? Less than 14 DTE? Do you roll? Close? How close to expiration do you normally let the trade run until you decide to manage things? (I've experimented with rolling out and up in backtests, but it doesn't always work. I have not really been able to determine what the optimal exit point is when the trade is in a loss. More of a "feel" thing for me -- and how secondary indicators look, such as the term struction, the VXV/VIX ratio, etc.)
NaughtyPines
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@Jaymanicus, You're absolutely correct about the risk/reward. To a certain extent, the setup's an experiment in progress. If the notion is that max profit will occur with a finish below the short option and you will hold until expiry, then you don't want that to be too far away from current price. Conversely, if the mechanical approach is to take profit at 50% max, why not go for a setup that accommodates some modest contango erosion, but that has a better risk/reward (which generally also means lower buying power effect). Right now, I'm "playing" with the former approach as far as setup, but seeing how quickly they come off at 50% max, and will evaluate from there; personally, I don't like holding stuff until expiry, as pops can come at the most unexpected and inopportune times, so I'm leaning toward the 50% take profit and will probably putz with where to set up the spread to get a better risk/reward (e.g., a max profit of around 1/3rd the width of the spread). As far as losers are concerned, I will roll "as is" (no strike improvement) at 4 DTE for duration, as time is on your side with these setups (more time = greater likelihood of success). The reason why I will literally wait until the last moment to consider rolling is that we've seen these things pop, only to cave dramatically within a few days, such that a loser at 10 DTE could very well be a scratch trade or a winner at 4 ... . With these particular trades (UVXY, VXX), I will roll losers until I can scratch them out. This naturally ties up BP, but a single max loser can undo multiple iterations of 50% max winners, so I find it's best to be patient, let contango work for me over time.
Also, how do you manage shorter duration trades like this one -- with 50 DTE (anything less than 90d for me) -- when volatility rises at the wrong time? For example, less than 21 DTE? Less than 14 DTE? Do you roll? Close? How close to expiration do you normally let the trade run until you decide to manage things? (I've experimented with rolling out and up in backtests, but it doesn't always work. I have not really been able to determine what the optimal exit point is when the trade is in a loss. More of a "feel" thing for me -- and how secondary indicators look, such as the term struction, the VXV/VIX ratio, etc.)