August 24, 2017

Potential Bull Put Spread in UVXY

Yesterday I received an email from one of our loyal readers asking to add Ultra VIX (UVXY) to our mix of highly-liquid underlyings we follow. UVXY, like VXX suffers from contango, so there is a natural bias towards the downside. However, the implied volatility is almost twice that of VXX which is appealing as a seller of options. Of course, that is to be expected since it is the “ultra” VIX, but the UVXY is liquid enough to put on some decent spreads and I’m still comfortable selling options with volatility levels that high. Just remember, as always, keep your position-sizing in check.

Anyway, if you take a look at the chart below you will quickly notice that UVXY is in a short-term oversold state.

5-6-14 UVXY

The pop higher occurred today with UVXY up roughly 0.67%, but that certainly doesn’t define a strong move. But we do have a little room beneath us now to gauge where we would like to sell a spread.

As I stated yesterday, I tend to side with a higher probability trade. Some prefer to go out one std. deviation and there’s nothing wrong with that, it’s just that my preference is to take a more conservative approach and shoot somewhere between 1-2 std. deviations. For example, in UVXY, with it trading around $52.80 and a low of $51.45 today I might look to sell the June 42/41 bull put spread with 44 days left until expiration. I can sell the spread for roughly $0.30, which means I stand to lose $70 per spread because the spread is only one strike wide. In most cases I like to sell a two strike wide spread so I can push my probability of success higher and while still maintaining a decent level of premium, but due to UVXY’s heightened IV I only have to use a one strike wide spread.

Also, the probability of success on the vertical put spread is 80.23% so it fits within my 1-2 std. deviation requirement. It would take UVXY to drop 18.5% from its current level to enter into a break-even scenario.


Anyway, thanks again LP for the suggestion. And please don’t be shy, if any of you have further suggestions as to what you would like to see in the daily blog don’t hesitate to email me.

High-Probability Mean-Reversion Indicator 5-6-2014


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