In particular, going into the earning season, the 30 day Implied Volatility (IVX30) of these high beta stocks revealing a lot of information
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
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
Combined this concept with the $VIX term structure Backwardation concept that I rambled about 2-3 weeks ago. huge winner
The premium of UVXY options are directly proportional to the IVX30 of $UVXY. Hence there is a huge edge in UVXY options
Continue tomorrow around 7:30 PM ?
Very important concepts moving forward for the strategy portion of the rambling tomorrow.
This concept will also be important for the strategy portion of the discussion tomorrow
What is a volatility drag?
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.
Okay. Stop here. Hoping everyone got the basic concepts of the drags, and their horrible & shocking effects on most of the leveraged ETF
Used for a quick couple of weeks trades or hedges.
Okay, I will do something different tonight.
I will show two charts tonight for you to study.
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
Very important chart going forward.
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.
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.
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.
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
This is a very important concept. Usually, people got greedy, catching the falling knife, getting into trouble
Waiting for the IVX30 to turn down and waiting for the VXV/VIX to turn up at the same time, high probability.
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)
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.
This is for more advanced options players and need to be monitored carefully.
Stop here for a minute for questions or suggestions.
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
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
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.
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)
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 key is never wait, and roll it immediately when in danger.
Okay, any comments and questions?
Furthermore by using Deep OTM Call
In addition, with extra "roll out and up" as a final option to further increase the probability of expiring worthless. Great R/R
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.