Thread by @kerberos007

As I mentioned previously that this table contains so much information that you can actually making money off it by monitoring it everyday

In particular, going into the earning season, the 30 day Implied Volatility (IVX30) of these high beta stocks revealing a lot of information

https://twitter.com/kerberos007/status/1020297552569274370

For example, pay particular attention to the IVX30 for $UVXY , and monitor it's daily changes and if there is anything that can turn into a profitable strategy which has an edge in making consistent profit with minimum and calculated/defined risk.

Continue?

Also, in addition to IVX30 of UVXY, pay special attention to IVXHL of UVXY

IVXHL is define as the current IVX30 in relation to the IVX30 one year range

For example, current IVXHL is 0.08, which means the current IVX30 (106 %) is about 8% of the past year range, which is low

Questions so far?

Two very important concepts must understand before we go into details about the strategies

When $SPX tanking, $VIX & $UVXY spiking, so does the Implied Volatility of UVXY. The Implied Volatility of UVXY (IVX30) and its yearly range are two crucial concepts

As I have monitored the Implied Volatility for $VIX $VXX & $UVXY for a few years now, the most consistent pattern occurred in $UVXY (not $VIX , $VXX), meaning the cycles in $UVXY is definable and persistent, and we can devise a profitable strategy around this recurrent cycle

I should say the cycles occurred in the IVX30 & IVXHL of $UVXY is definable and persistent and we can devise a profitable strategy around this recurrent cycle

Combined this concept with the $VIX term structure Backwardation concept that I rambled about 2-3 weeks ago. huge winner

Excluding the Febuary $VIX explosion, the normal range for IVX30 of $UVXY is about 90% to 150%, comparing that to the IVX30 of $SPX, which is only 12-13% now

The premium of UVXY options are directly proportional to the IVX30 of $UVXY. Hence there is a huge edge in UVXY options

Need to stop here for people to catch up with the concepts.

Continue tomorrow around 7:30 PM ?

If anyone forgot the concept of backwardation or contango for $VIX term structure, please take this opportunity to refresh the concepts again.

Very important concepts moving forward for the strategy portion of the rambling tomorrow.

Thanks.

Also, another important concept that I discussed about 1.5 weeks ago: that is $VIX futures "Negative Roll Yield" concept and its effect on the $VXX, $UVXY, and $TVIX ETN asset classes

This concept will also be important for the strategy portion of the discussion tomorrow

Thanks

We have talked about the "negative roll yield" drag on the $VIX futures when rolling from an expiring month to a later month - sell low and buy high - due to the Contango term structure. The $UVXY used to be a 2X short term VIX futures ETN, As of Feb 28th UVXY will target 1.5X.

But, the negative roll yield resulted in huge losses on UVXY ETN, even when the $VIX stayed flat. Below is a 5-year chart that I showed before for your reference.

It showed the "design to go to zero" ETN trend for the last 5 years, thanks to the multiple reverse splits.

But, the roll drag is just one factor causing it, another major factor that people do not wanted to talk about the 2X, or 3X leveraged ETF/ETNs is the Volatility Drag, which I think is even more profound than roll drag.

What is a volatility drag?

Assume:

1 VIX down 10% today, up 10% tomo, down 10% next, then up 10%.
2. 2X down 20% today, up 20% tomo, down 20% next, then up 20%

VIX stayed even after 4 days. What happened to 2X or 3X?

Yes, you got it, 2X ended down, and 3X ended down even more.

Volatility Drag to 0.

Even without the roll drag, the volatility drag for 2x and 3x and even 4x leveraged ETF/ETN for financials, commodities and SPX, etc are designed to go to 0 eventually even the 1X stayed flat.

And our options strategy for UVXY is designed to take advantage of these two drag factors, capitalizing the "designed to go to zero" ETN

Okay. Stop here. Hoping everyone got the basic concepts of the drags, and their horrible & shocking effects on most of the leveraged ETF

Next time when you think about buying the 2x or 3x leveraged ETF/ETNs, condider your time frame carefully. These leveraged ETFs are only good for short term trades, not for long-term investment as illustrated in previous chart

Used for a quick couple of weeks trades or hedges.

I have many good options traders here showing tremendous interests in devising a good strategy for the UVXY options play, and have requested some charts from me for them to study.

Okay, I will do something different tonight.

I will show two charts tonight for you to study.

Hopefully by tomorrow, we will have multiple excellent strategies presented by a few good options strategist here which would take advantage of the roll drag as well as the volatility drags of UVXY ETN. The most deadly two drags combined into one ETN.

I will give people (esp options strategists) some time to study the charts, and will continue the rambling tomorrow.

Okay here comes the first chart:

This chart showing the Backwardation condition:

VXV / VIX ratio < 1 implying the VIX futures is in backwardation - Ex Fear.

When XVX / VIX ratio < 1, showing extreme fear in the options market.

This chart also showing the correlation among the $VXX $UVXY $VIX and $SPX during the extreme fear period. Marked A, B, C, D, etc. for easy discussion.

The next char is the main course of the day.

The relationship of the 30-day implied volatility (IVX30) of UVXY and the UVXY itself.

Also marked the same A, B, C, D as the previous chart for easy correlation study.

Will continue tomorrow around 7:30 PM.

I forgot to mention, in addition to taking advantage of the two biggest drag factors demolishing the UVXY, the strategy has to have limited and defined risk

Naked shorts is outside the scope of this discussion. It is a valid strategy, but we do not want to have another 2/5 spike

Hope people reviewed this chart already.

Also reviewed this chart.

Very important chart going forward.

And already understood the below concepts:

1. $VIX term structure - Contango & Backwardation.
2. Negative roll yield - roll drag for $VIX futures contracts.
3. Price Swing volatility drag for 2X, 3X or 4X leveraged ETFs.
4. VXV / VIX ratio < 1 --> extreme fear.

5. Relationship between the Implied volatility (IVX30) & UVXY itself.

Someone asked one very important question:

If UVXY trades under 10, there is really not much room to play with.

Yes, very true, 2-3 years ago, when it was above $30, some very profitable trades existed.

However, $UVXY is just one of many possible instruments that one can profit from, taking advantage of the roll drags as well as the volatility drag.

One of my favorites would be $SDS (or $TNZ, or $QID, etc) which is 2X ultra short of $SPX, and the Options liquidity is very good.

If nobody interested in $SDS strategy, I would not cover it at all.

Now, back to UVXY strategy

Rule #1. only initiate long UVXY positions (long delta & Vega) when the IVX30 below 100, and IVXHL < 10%

Rule #2. only initiate short delta and short vega positions when IVX30 > 130 and VXV / VIX < 1 entering the position when IVX30 turning down

By IVX30 turning down meaning, we do not want to catch a falling knife. We want to have the Extreme fear settling down before entering the Short Delta/Vega positions

This is a very important concept. Usually, people got greedy, catching the falling knife, getting into trouble

Sometime even I have to remind myself to abide this rule. Very hard to do in real life. But, this has to be followed, in order to not get caught in a crash market.

Waiting for the IVX30 to turn down and waiting for the VXV/VIX to turn up at the same time, high probability.

Now, what are some good Options play for Long Delta/Vega. Rule #1
I will rank them form 1 to 5, 1=least desirable. 5=Best

1. Long UVXY (1)
2. Long UVXY calls (1)
3. Long UVXY with Short call (covered call) (3)
4. Long UVXY Bull Call Spread (3)
5. OTM Bull Put spread (4)
6.

6. Cash backed Short OTM Puts (5)
7. Naked call and naked puts are out of the scope of this discussion

My favorite being the cash-backed short OTM puts, with an intention to get assigned

If assigned, continue selling the short ATM or OTM calls to convert it to a covered call.

8. Advanced user: Short Bull Put spread to fund the long Bull Call spread.

This is for more advanced options players and need to be monitored carefully.

Stop here for a minute for questions or suggestions.

For those who are interested in other instruments, here is an example for SDS

The attached chart showing the price volatility drag effect on the 2x inverse ETF

From 2015 to 2016, the $SPX stayed almost flat with +2-3% gain

But the SDS lost almost 25%. This is volatility drag

SDS is 2x inverse of $SPX

In theory the SDS in the same period should only lose 4-6%

But due to the price swing volatility drag, it lost almost 25%

To the same token, FAZ, QID & other 2x and 3x leveraged ETF would also have the same volatility drag, we can take advantage of

Okay, I just made this chart in a hurry, may have errors:

Comparing this chart with the one I posted yesterday for UVXY, it exhibited the exactly the same behavior. Highly tradable for taking advantage of the volatility drag.

This is the SDS chart.

Marked with the Backwardation level as well as the Euphoria level.

Also the same A, B, C, D, etc spots as the UVXY chart.

Okay, Just made this one as well.

The VIX30 of SDS vs. SDS price chart.

Same A, B, C, D points as IVX30 & UVXY chart posted yesterday.

One good point on this chart is that the Spike of SDS price on Feb 5th was not as drastic as other instruments due to the volatility drag.

Now, back to UVXY rule #2 Strategy (also apply to other leveraged short ETFs)

Rule #2. only initiate short delta and short vega positions when IVX30 of UVXY > 130 and VXV / VIX < 1 entering the position when IVX30 turning down

One of my favorite options play would be

1. OTM Bear Call spread.

I usually extensively used the OI chart for finding the strong resistance levels for each expiry series. I usually have my short leg of the spread hiding behind the 3rd highest Call OIs.

By hiding behind the third highest call OI hoping the price would not penetrate both the highest OI & the 2nd highest OI

If the price violated the first highest OI point, I would immediately roll my Bear call spreads out to a later month and higher strikes (using OI as a guide)

By rolling out and up to a later expiry immediately when there is an danger to become ITM is very important.

I would waste any time, if the highest OI is penetrated. Do it right away.

Usually, one roll out and up would be fine and it would expire worthless eventually.

The maximum number of times for me in the past is to roll two consecutive times, and it would eventually expire worthless.

The key is never wait, and roll it immediately when in danger.

Okay, any comments and questions?

Haha.. Confused? No questions or suggestions?

By using Bear call spread would take advantage of the roll drag & volatility drag of the UVXY, because that put some tremendous down side pressure on the UVXY. Hence, the Bear call spread would have a higher probability of expiring worthless.

Furthermore by using Deep OTM Call

Using deep OTM Bear call spread with the OIs as a guide to select the short leg of the spread would also improve the probability of expiring worthless

In addition, with extra "roll out and up" as a final option to further increase the probability of expiring worthless. Great R/R

That is all I have for UVXY options play, with limited risk and very high R/R when Rule #1 and Rule #2 are followed.

1. Long Delta/Vega when VIX30 is very low, and
2. only Short Delta/Vega when the VIX30 is very high and VIX term is in Backwardation and reversing.

Thanks.