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My UVXY Options Strategy

|Includes:SVXY, TVIX, ProShares Ultra VIX Short-Term Futures ETF (UVXY), VXX, XIV

Welcome to my first InstaBlog post. I received a ton of feedback wanting more information on my options strategy for UVXY.

Before we begin I want to point out that purchasing SVXY is a suitable alternative to this strategy. To each his own and I prefer using UVXY options in the current environment.

I have two different strategies:

Selling calls and purchasing puts (really the same strategy when you think about it).

Selling calls (naked)

This requires a higher level options clearance and a margin account.

It is important to not margin yourself out in these trades in case it ends up not going your way.

Strategy: Once volatility has spiked and is in decline, sell an at the money UVXY call. At the money calls provide the biggest time value decay benefits. I also sell the longest range call, usually at least a year left until expiration. The further out the option is, the more extrinsic value it has.

Once UVXY has pulled back about 20-30% I will liquidate my position and wait for the next event.

Buying puts

Buying puts give you the flexibility of not being margined out. Essentially the most you can lose is 100% where there is a possibility of losing more than 100% with selling calls.

My strategy for buying puts is a 3 prong approach.

I again wait until after volatility has spiked and is in decline.

1. Use weekly options - 20%

2. Use monthly options - 60%

3. Use quarterly options - 20%

Above you can see the allocation. I never purchase Puts more than 90 days out for UVXY. The reason is I plan on exiting the position in 15-40 days. I collect that premium on the way down and I liquidate my position and wait for another opportunity.

Timing

Timing for this strategy is essential. I would focus on contango and backwardation. VIX Futures will enter backwardation on a spike in volatility. As the % backwardation begins to decrease this should signal to you that the VIX futures are starting to decline. Once futures enter contango this should be a confirmation that the event, economic condition, situation, that caused it to spike is beginning to calm down.

It is very important to keep track of economic and political events during these spikes. It is up to you, the individual investor, to predict moves in the market based on the data you have available. There is no guaranteed strategy for timing spikes in the VIX. I am more conservative and wait for the situation to play itself out. Others are not and try and time the peak. This is a dangerous strategy.

I have a good article on how UVXY and SVXY would have reacted in 2008 and 2011. It would be helpful for insight on timing. Even though UVXY went up over 1000% during 2008, it still would have ended up negative less than one year later.

Stop Loss

To prevent unexpected capital erosion I use a stop loss instead of a hedge.

Portfolio

VIX Trading makes up 20-30% of my investment portfolio. I do not recommend using these strategies with 100% of your portfolio.

With my age I am fine with taking higher risks. However, as I progress I take the gains made trading the VIX and allocate it to longer-term investments. Thus lowering the portfolio percentage.

I hope you found these strategies helpful. Last year they yielded me an 86% return. I only make these trades 3-5 times per year because I wait for strategic opportunities based on the above timing.

It is important to understand what you are doing before entering these trades. I recommend a practice account or several years of research before making this a permanent investing strategy.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: If this article leaves you with questions then you are not yet ready to trade VIX ETPs. Make sure you do extensive research on timing, economic conditions, outlook, and risk before entering into any of these strategies.

Stocks: UVXY, SVXY, VXX, TVIX, XIV