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My metric R is at 3%, getting close to the 4% to switch to $UVXY Aug 1, 2014

Bought 8/8 expiration $VXX puts strikes 27, 27.5, 28, 28.5, and 29. will buy more tmrw. Up about 10% for now. Jul 28, 2014

I will be buying $VXX puts Monday close of business and Tuesday mid day and close of business Jul 25, 2014
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New SVXY Strategy 114 comments
Strategy in a nutshell. I really don't have the time to write a formal article, but want to share the findings.
Note: I used simulated SVXY from VIX futures.
First create optimal SVXY investment strategy alone (call it S).
Step 1. Define R = average(F1/V,F2/F1)  1 where
V = VIX
F1 = first month future
F2 = second month future
Step 2. Calculate average R from inception to date
Step 3. Invest in SVXY if current R > 1 * average historical R, invest in UVXY otherwise
The historical value of R is currently 4.8%. It has bounced quite a bit, going as low as 3.4% and as high as 11.3%.
Average annual return of strategy S from 2004 to 2014 is ~100% compared to ~35% for holding SVXY alone. You are invested in UVXY 6% of the time and in SVXY 94% of the time.
But still deep max drawdowns exist e.g., 85%+ in 2007 to 2008 during the market crash. In the same period SVXY crashed by 90%.
So we need to do better. Doubling money each year is good but drawdowns are scary.
Now, in comes options. Call this strategy SO (S above, plus options)
On each January, buy one year SVXY puts with strike 30% out of money, and one year SVXY calls with strike 40% out of money. Put 12.5% of entire portfolio in puts, 37.5% in calls, and the remaining in the strategy S as above.
Average annual return of strategy SO from Jan 2005 to Jan 2014 is ~170%. Max annual drawdown is 28%. Strategy returns by year
So only two down years and some massive up years.
That's all folks!
Disclosure: The author is long SVXY.
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In the previous incarnation of this strategy published by you it was:
R = (F1/V  1 + F2/F1 1)
2. Any Spot VIX spike can cause the futures to go into backwardation and thus cause you to lose SVXY gains
3. Low averages will eat away at your option premiuns since gains will not be large.
1. Averages over 67& go with your method
2. Average of 5% and descending carefully looks into the economic and political events and get ready to take action
3. Averages less than 34% move to cash and wait thinks out
4. Vratio over 5% (or under .95% depending upon you you use the calculation) move to UVXY
I am confused by > Step 3. Invest in UVXY if current R > 1 * average historical R, invest in SVXY otherwise.
V:10.52, F1:11.78, F2:12.72
So R equals 9.97% which is greater than 4.8% so invest in UVXY? Is that right?
this is great stuff, thanks so much for sharing!
sorry, I think I didn't say it right. I meant as an alternative to using R calculation to know on monthly "S Strategy" to switch to uvxy or not, to use the contango chart on vixcentral.com. Would that be a good alternative and still follow the simple "SO strategy" with the january options.
F2= 10,82 (2 july Close)
V = 10,32 (3 july close)
F2/F1 = 0,97
July Future 11.72
August Future 12.65
now about other step, how to calculate historical average R?
on how many days you calculate average R ?
you calculate all on excel ?
change 30 to 360 (or however many days you want). Copy and paste to excel spreadsheet. Since this doesn't include historic spot vix, down loaded from here: http://bit.ly/1qFrDw0
save, sort by date, combine into spreadsheet, then play with graphs (I can't graph more than 255 points in excel, so multiple graphs may be necessary). Add columns with the R calcs. I added a column for 14dsma on R, and delta today's R against 14dsma (just for fun  not that 14dsma is special). Also added column for UVXY daily decay (F2/F11)*2(for 2x)/20(trading days)*100. Hopefully collaborative effort will help. GL.
"But Macro's straddle still comes out top with respect to historical returns and is easier to set and forget.1) Also has advantage that there's no huge advantage in timing entry, upon entering the trade you're unbiased as to future direction, albeit there's much more profit on the upside and the downside."
Good lord the vix itself the first week of 2009 eod was between 38.5 43.3 . Whereas the vix associated with the 53% IV at the publishing of this blog entry was only 11.57 11.26 (fridaymonday since published on sat).
The ONLY people that get imaginary pricing at those sweet rates are Hillary Clinton reminiscent of her cattle futures trading miracle.
Could you post the yearly returns of all 3 strategies using that as your IV pricing. Collectively over the 9yr period this would probably be a general worst case scenario.
Additionally this would allow readers to develop a range of possible returns and correspondingly tailor their interpretation of past market environments better.
Why are the puts at 12.5 % and the calls at 37.5%?
as opposed to 50/50. Is this because SVXY is in contango the majority of the time?
http://on.mktw.net/1p6...
http://on.mktw.net/1p6...
SVXY: 50% of portfolio = flat
calls : 37.5% of portfolio = complete loss
puts : 12.5% of portfolio = complete loss
thanks very much, this makes things very clear.
mike
purchase puts 7/3/2014 20.60
sold some puts 10/15/2014 37.00
value 10/28/2014 26.70
purchase calls 7/11/2014 27.14
value 10/28/2014 11.42
purchase calls 7/14/2014 17.80
value 10/28/2014 5.10
purchase calls 10/15/2014 15.79
value 10/28/2014 26.80