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• ##### New SVXY Strategy 116 comments
Jun 29, 2014 4:19 PM | about stocks: SVXY

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

 2013 84.2% 2012 504.1% 2011 -28.0% 2010 507.2% 2009 492.8% 2008 291.9% 2007 -24.1% 2006 188.3% 2005 179.0%

So only two down years and some massive up years.

That's all folks!

Disclosure: The author is long SVXY.

Stocks: SVXY
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• VTH
, contributor

Macro, thanks a lot. Whats the option premium did you use
29 Jun 2014, 04:45 PM Reply Like
• Author’s reply » 53%, the current one.

At 60%, the average annual return is 130%, max annual drop ~35%

At 70%, it is 98% and the max annual drop soars to 50%. Might not use the options at all then, but at least you get drawdown improvement.

Would much appreciate if someone else can replicate the results.
29 Jun 2014, 04:50 PM Reply Like
• RJL1955
, contributor

VTH:

When you ask what the option premium is, are you asking for what percentage he used between the bid and the ask for these options?
29 Jun 2014, 10:38 PM Reply Like
• Author’s reply » I didn't consider bid/ask. I used straight Black Scholes. Having bought and sold these annual options, the black scholes value typically falls between bid/ask and you can definitely buy them at the Black scholes value. The key thing is to get the IV that you are paying right.
29 Jun 2014, 10:43 PM Reply Like
• Great job, I am going over this and want to try it out.

Are you actually doing anything like rolling these out or do you just let the chips fall at whatever price you bought at?
29 Jun 2014, 06:16 PM Reply Like
• Author’s reply » I plan to roll once a year. I am so busy at work right now that I can't really look at the markets all the time.
29 Jun 2014, 08:55 PM Reply Like
• jared1713
, contributor
Comment (1) | Send Message

What do you mean when you say that you plan to roll once per year? What are you rolling?
28 Dec 2014, 09:19 PM Reply Like
• nickaz99
, contributor

So what is the R average from inception to date?
29 Jun 2014, 07:16 PM Reply Like
• Author’s reply » Right now it is 4.8%. It has been as low as 3.4% and as high as 11.3%. Updated article with that.
29 Jun 2014, 08:55 PM Reply Like
• RJL1955
, contributor

Macro:

Just want to get your math figured correctly.

Based on prices now, is the calculation:

11.26/12.6 + 12.6/13.50 -2 = -0.1731

And since this number is greater than -1 (since lower negative numbers are worth more than higher negative numbers) are you saying that you should be in UVXY now?

This does not sound right to me, especially with contango so high and futures expiring in 2 weeks

29 Jun 2014, 07:58 PM Reply Like
• Author’s reply » Shit. It is F1/V + F2/F1. Let me correct!!!!
29 Jun 2014, 08:32 PM Reply Like
• amis1
, contributor

Macro
In the previous incarnation of this strategy published by you it was:
R = (F1/V - 1 + F2/F1 -1)
29 Jun 2014, 09:25 PM Reply Like
• Author’s reply » That's what happens when I post fast. I corrected it above.

Define R = average(F1/V,F2/F1) - 1
29 Jun 2014, 09:27 PM Reply Like
• rodh7858
, contributor

Just to clarify is the function average(F1/V,F2/F1) equal to (F1/V+F2/F1)/2 ?
29 Jun 2014, 11:03 PM Reply Like
• mikeginn
, contributor

yes...
29 Jun 2014, 11:50 PM Reply Like
• Author’s reply » Yes that's right.
29 Jun 2014, 11:51 PM Reply Like
• Author’s reply » Basically it's a simple idea. We make money because of contango. So how much contango is there? How much, on a percentage basis, is F1 over V, and F2 over F1? We should get the average of these two gaps in 20 days (as SVXY is a mix of these two). Now if I wanted to be toally accurate I would have weighted these, but a simple average works fine. But if we switch to UVXY when the ratio goes negative we are being way too conservative as contango is typically short lived. So, I would endure SVXY even as the ratio has gone negative, up to -1 times what the ratio has been on average so far.
29 Jun 2014, 09:30 PM Reply Like
• ianxponent
, contributor

I think you mean backwardation is short-lived, no?
29 Jun 2014, 11:02 PM Reply Like
• Author’s reply » Yes that's exactly what I mean, sigh. I am not getting thigns right today. Working too hard I guess.
29 Jun 2014, 11:51 PM Reply Like
• RJL1955
, contributor

Macro:

Yes, it is a simple idea (ride contango and switch to UVXY when backwardation exceeds 5% (I like to use the Vratio in my calculations).

However, for more active traders and those who can allocate more time to the market, I find this a little to simple. Problems I see are:

1. When negative roll/contango (your average) is less than 5%, then any Spot VIX spike can wipe out many gains that have occurred over the last few months
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.

You can see this in the first 3 months of this year when contango averaged less than 5%.

I would prefer to invest as follows:
1. Averages over 6-7&- 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 3-4%- move to cash and wait thinks out
4. Vratio over 5% (or under .95% depending upon you you use the calculation)- move to UVXY
30 Jun 2014, 08:42 AM Reply Like
• Author’s reply » RJL, That makes a lot of sense if you can track market conditions and news. It is ultmately all about news. I could do it last summer when I took a 3 month break for work to recharge and made a lot of money trading options on VXX. But that was then. :-)
30 Jun 2014, 08:56 AM Reply Like
• RJL1955
, contributor

Macro:

30 Jun 2014, 09:14 AM Reply Like
• mikeginn
, contributor

Thanks for your work wrt VIX and SVXY education here.

I've been just long SVXY since the billionaire article with fine results, looking for but not finding anything I wanted to trust wrt the drawdowns that are inevitably coming -- it's clear now what an effective strategy might look like. I've worked a bit right now with your S strategy, enough to get the idea of how it describes the direction and degree of slope of the VIX structure. I'll now get to work on understanding the impacts of the options spread you are describing.
30 Jun 2014, 12:24 AM Reply Like
• Learner16
, contributor

Thank you, Macro, for the post. This is half buying SVXY and half buying a strangle. Do you think it might work doing the same (but opposite) with UVXY?
30 Jun 2014, 05:40 AM Reply Like
• Author’s reply » I didn't try UVXY but tried VXX. The results are not as promising. That's because the long/call on SVXY has unlimited upside, but the short/put on VXX is limited by a bottom of 0. I suspect the same will be the case for UVXY.
30 Jun 2014, 08:32 AM Reply Like
• RJL1955
, contributor

Macro:

In your SO strategy, you say "put 12.5% of ENTIRE portfolio"

Are you recommending for everyone to use their ENTIRE portfolio in Volatility?

If not, what percent of your entire portfolio do you allocate to volatility (just curious since you mentioned many times that you are in top 1% and your entire portfolio would be very large).

Thanks
30 Jun 2014, 08:35 AM Reply Like
• Author’s reply » Oh no, this is for 12.5% of the volatility portfolio! In other words, whatever you decided to invest in SVXY long only in the past, 12.5% of that.

Now, I can't recommend how much of the total portfolio to put in SVXY. Risk appetite's vary between individuals. That's a very personal thing.
30 Jun 2014, 08:54 AM Reply Like
• RJL1955
, contributor

Thanks Marco,

Just wanted your confirmation and I totally agree with you!!!
30 Jun 2014, 09:16 AM Reply Like
• windwine
, contributor

"All in or nothing!" The Adidas world cup campaign :-)

Glad to have you back and thanks Macro.
30 Jun 2014, 11:45 AM Reply Like
• ianxponent
, contributor

So, am I correct in thinking that there hasn't been a signal to go into UVXY since sometime in August, 2011?
30 Jun 2014, 02:39 PM Reply Like
• Author’s reply » Nope. It triggered in Feb, 2014.
30 Jun 2014, 03:08 PM Reply Like
• ianxponent
, contributor

So it looks like it would have been a quick in and out unless you wait a bit to confirm the trend back towards contango. Is there a good source of historical data for F1 and F2?

BTW, I'm sure I'm not the only one who appreciates your sharing of this intriguing approach to investing in SVXY. Your article last summer has proved quite profitable!
30 Jun 2014, 04:01 PM Reply Like

I got the technique to download VIX futures data from the above link. And thanks! I just want to share what harebrained ideas I come up with and hopefully help everyone. I have learned more by trying to answer the questions that people ask.
30 Jun 2014, 05:13 PM Reply Like
• Interested18
, contributor

What do the returns look like if you only invested in SVXY and the options each january? What is the average annual return and the returns for each year? For those who have even less time, looking to see what it would look like to leave it there the entire year and not move in and out of SVXY/UVXY.

Thanks
30 Jun 2014, 06:36 PM Reply Like
• Author’s reply » Good point have to run the numbers. Will post next week. My fun time outside of work is over this week. :-)

Also, is there any way for me to post the Excel on SA? Then people can download it and run their own analysis.
30 Jun 2014, 06:41 PM Reply Like
• RJL1955
, contributor

Macro:

I also want to thank you for your article last year and the in-depth conversation that occurred.

You have made many people a lot of money (myself included) and we are all grateful that you share your wealth of knowledge.

Many of us have been trading/ investing in volatility for the last few years and maybe we you can generate an instablog called trading action, where many of us can post during the year the trades we are making and why we are doing this (similar to what I had posted on the different contango averages I see and how I move from SVXY into cash and maybe into UVXY).

Best regards.
30 Jun 2014, 08:53 PM Reply Like
• thetortoise
, contributor

RJ/Macro/Others - it would be awesome if you would be willing to share your knowledge through a 'trading action' type of blog. I have been waiting for a dip that has never come for months now and missing out on tons of gains. Fortunately I finally gave in and bought 'some' ZIV, which has been performing well, but hoping to really turn things around in the second half of the year and start making money with volatility again. I spent a lot of time last night going over this blog post and will be ready come next January to implement a better plan than I had this year... I learned all about opportunity cost (opportunity lost) in the first half of the year, let's see what I learn in the second half! Any advice at this stage for someone with no exposure to XIV/SVXY for the rest of 2014? Thanks again!
1 Jul 2014, 03:00 PM Reply Like
• RJL1955
, contributor

tortoise:

Here is another trade that I tried (and like in markets that are stable or slowly increasing).

Do a calendar spread- buy deep in the money calls (so there is little or no time premium) and sell weekly out of the market calls (by at least \$2 higher than current price).

If we slowly grind higher on SVXY, then the weekly options will expire worthless and your cost basis will be reduced. If SVXY exceeds your covered call strike price, then roll them over each week at the same strike price or increase the strike price if you feel strongly that there is more room for growth.

Get's you a decent return each week as long as SVXY does not get hit by a nasty surprise.

This is not a homerun option, but one that can add some money into your bank account.

Disclosure- I bought the July 18th calls at a strike price of \$85 a few weeks ago. I had sold 3 weekly calls since then (strike price 87, 88 and this week 90)and my average cost now is about \$4. By Friday, if I close them out, assuming todays price stays the same, I could either rebuy the \$90 back (maybe 0.75), sell the 85 (maybe at \$6.5) and make \$1.75 (44% return on capital at risk) since inception. Alternatively, if jobs number is good, I will roll them forward another week and decide on whether to keep the same strike price or increase the strike price (for same premium).
1 Jul 2014, 06:56 PM Reply Like
• RJL1955
, contributor

FYI

I rolled this past weeks options to next Friday's options at a strike price of \$93

Cost me 45 cents but possible profit has increased substantially.

At Friday, I will close this trade out and look to start another trade using August options.
4 Jul 2014, 11:51 AM Reply Like
• Author’s reply » I would buy some 2016 calls far OOTM.
1 Jul 2014, 03:36 PM Reply Like
• RJL1955
, contributor

Personally, I would buy them after a jump in the vix futures.
1 Jul 2014, 06:57 PM Reply Like
• ianxponent
, contributor

One possibility for a jump in volatility could come later this year if the GOP retakes the Senate. The tea partiers in Congress will then start to discuss impeachment seriously and that should be good for a spike in volatility thus producing good entry points for SVXY using M.I.'s strategy. Fortuitously that might all take place around the start of or into next year. Of course ultimately, impeachment won't go anywhere but we'll have made lots of money in the meantime. Who says the tea party isn't good for something?! ;)
1 Jul 2014, 04:24 PM Reply Like
• Author’s reply » I made a LOT of money in Dec 2012/Jan 2013 with the default crisis. I knew the GOP would fold so bet heavy on UPRO. didn't know about SVXY then. I love manufactured crisis.
1 Jul 2014, 04:43 PM Reply Like
• RJL1955
, contributor

I have also been in UPRO (since about April this year).

Figured if we would slowly grind upwards, I might as well earn 3 times what the market has gained.

Today's action was icing on the cake!!!
1 Jul 2014, 06:43 PM Reply Like
• VTH
, contributor

Hi Macro, can we request you for yours thoughts on S&P this year end and to next 6 quarters. You mentioned we may exceed 2100 of your prediction by year end. Sorry, we may be asking a lot from you, but your prediction last year was damn accurate. Thanks and grateful always.
2 Jul 2014, 10:40 AM Reply Like
• Author’s reply » I actually want to do that analysis myself so stay tuned!
2 Jul 2014, 11:53 AM Reply Like
• fritz68
, contributor

Firstly, thanks for the article Macro, the returns are impressive. Like other here I've done well using ideas based on your earlier UPRO/SVXY articles (which made me re-think risk associated with these products).

As an alternative I've (using back of envelope calculations) worked out the returns beginning in 2004 of a buy-and-hold strategy using SVXY combined with 1 yr ATM puts. I used current option pricing which is 20% of SVXY cost provides 12 months protection (e.g., Jan 2016 90 put costs \$26, so 12 months cost \$17.3 or 20% of cost). Of course theta is low in first yr but for simplicity I've calculated buying ATM puts as a sunk cost that there's no return on other than in down yrs. So I pay 20% of total investment every year and get nothing back on puts in up years.

With \$100k invested in 2004 I get approximately \$2million at 2013 end using this system (again, back of envelope).

The advantage would be avoidance of capital gains on the buy and hold SVXY position (only reporting loss on puts for tax).

Given the returns on SVXY in good years, having a large percentage of your portfolio with max loss of 20% is a reasonable risk as compared to, e.g, having the same amount in SPY. I'd thus be more comfortable placing a much higher % of my portfolio in SVXY.

The only time you'd need to sell SVXY is if you need extra capital to cover the 20% ATM put cost.

The killer would be 3 bad years in the first years of using this strategy. I'm currently doing this but also sell weekly OTM SPY calls to recover the cost of the SVXY puts.

Any thoughts anyone?
3 Jul 2014, 06:32 AM Reply Like
• Author’s reply » I think that's an excellent idea. It's all about risk return. If you have the puts to protect you, the returns in the good years make the strategy a totally winning one. Also, you can sell covered calls each week to pay for the price of the put.
3 Jul 2014, 08:27 AM Reply Like
• RJL1955
, contributor

What about selling weekly covered puts against your leap put (maybe \$5 less).

This way it allows you to recover your put cost and you can monitor the news if you think SVXY will be in a bad patch (and thus stop selling these weekly puts)?
3 Jul 2014, 08:33 AM Reply Like
• nickaz99
, contributor

Svxy issues a K1. So you are still tax liable for unrealized gains. Unless the shares are held in a tax advantaged account in which case you wouldn't be worrying about tax implications anyway.
4 Jul 2014, 10:07 AM Reply Like
• Author’s reply » That is a great point. All of the above SVXY strategies should be done using XIV if in a taxable account.
4 Jul 2014, 11:37 AM Reply Like
• RJL1955
, contributor

mine are in tax advantaged accounts so no worry there
4 Jul 2014, 11:46 AM Reply Like
• RJL1955
, contributor

XIV does not have options, so you must use SVXY for option trading
4 Jul 2014, 11:49 AM Reply Like
• fritz68
, contributor

I've traded in an out of SVXY options before but always struggled with the bid-ask, so chose to sell SPY calls where liquidity is ideal. Even rolling up the long-dated is tough as, e.g, the bid ask is 23-27 then when you put in a mid-price bid it moves to 25-23 or 27-25. So I think set and forget is best.

I've also tried a system like you mention RJL, buy a long dated put and then sell ITM puts (bi-weekly) at a strike where I predict SVXY will be based on VIX futures. The extrinsic should cover cost of long-dated over time. My plan was to just get assigned shares on a crash/dip rather than roll. Again though, I felt like I lost too much on the bid ask of weeklies as too thinly traded and I'd also pay capital gains on short term trades.

Also if you look at weekly moves in SVXY it's too volatile and you get overrun on major up moves but take the full hit on down moves (minus extrinsic received)

The recovery cost of long dated puts is reasonable, 2 to 3 hundred dollars a week per 10x SVXY puts. I sell 20 SPY calls per 1000 shares SVXY. Some weeks no return, like this week I needed to roll, but the gains on SVXY more than offset any temporary loss on SPY, where I roll for credits
3 Jul 2014, 08:56 AM Reply Like
• RJL1955
, contributor

Fritz:

You would own either the stock or calls, so as it runs to the upside, you participate at 100%

The weekly puts to sold- I would use this only to try to recapture the cost on the leap put. If I see trouble brewing, I would not sell them and let your leaps be your protection on the downside. This can cover any problems you see brewing, but will not protect you in an extreme black swan event (since you sold the weeklies, unless you continue to roll them over if you think the black swan event will be settled).
3 Jul 2014, 09:10 AM Reply Like
• fritz68
, contributor

Ok, thanks for clarification RJL, that makes sense. I've also considered that and it might be better plan. I think it would be better with long-dated calls so the major loss is limited to the puts in the event of a black swan. Even if you only sell enough puts to cover cost, e.g, 3 short against 10 long, the low delta of the long vs short puts wouldn't provide much protection unless it was a major crash. But if you only sold when there's blue skies, like you say, then it would be ok.

I see recovery of cost of puts as a bonus and don't want to take any risk with them so I like to stay on upside (calls) where I know losses on SPY calls are offset by SVXY.
3 Jul 2014, 09:20 AM Reply Like
• rodh7858
, contributor

Macro
I am confused by -> Step 3. Invest in UVXY if current R > -1 * average historical R, invest in SVXY otherwise.

So for e.g. today (few mins back) the values were:
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?
3 Jul 2014, 11:07 AM Reply Like
• ianxponent
, contributor

No, how I understand it is that R has to be negative and its absolute value greater than average historical R. The idea is that you don't want to switch to UVXY unless backwardation has really taken hold. In other words, it's not enough for R to barely slip below zero, it has to go significantly negative to signal the switch. I would assume that the same switch point would be used when R has reversed course and moved back towards contango but maybe a clarification of that point is in order.
3 Jul 2014, 11:23 AM Reply Like

I shouldn't be writing any more. Seriously.

thanks Rod for the catch, I corrected typo above.

If current R > -historical R, invest in SVXY as the futures are in contango or in moderate backwardation.

If current R < -historical R, invest in UVXY as backwardation is significant.
3 Jul 2014, 12:44 PM Reply Like
• RJL1955
, contributor

Marco:

Keep on WRITING!!!!!!

Have a Happy 4th of July everyone!!!!
3 Jul 2014, 12:47 PM Reply Like
• sammyact
, contributor

Macro,
this is great stuff, thanks so much for sharing!

As an alternative to calculations of R, could we use the contango graph at vixcentral.com and anytime it goes into negative contango on graph switch to uvxy?

thanks again!
26 Jul 2014, 10:48 AM Reply Like
• Author’s reply » I wouldn't do that. My models show that you will be better off just holding SVXY.
26 Jul 2014, 01:05 PM Reply Like
• sammyact
, contributor

Hi Macro,
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.

thanks again!
27 Jul 2014, 03:59 PM Reply Like
• Author’s reply » I gotta run the model. I think I did and the results were better with R than with just C.
27 Jul 2014, 06:26 PM Reply Like
• sammyact
, contributor

Thanks Macro! That would be really cool to see if it's a reasonable alternative.
28 Jul 2014, 12:46 AM Reply Like
• mirko78
, contributor

R in this moment is 0,025 ??
5 Jul 2014, 02:23 PM Reply Like
• mirko78
, contributor

F1 = 11,15 (1 july close)
F2= 10,82 (2 july Close)
V = 10,32 (3 july close)

F1/V = 1,08
F2/F1 = 0,97

F1/V+F2/F1 =2,05

2,05 / 2 = 1,025

1,025-1 = 0,025 0,025 = R

is it right ??
5 Jul 2014, 02:23 PM Reply Like
• RJL1955
, contributor

In the calculations you have to look at the percentages, not the number. You have to use the spot vix, front month future and second month future.

CBOE website is messed up now because of the holiday, but assume the following:

Spot VIX- 10.32
July Future- 11.72
August Future- 12.65

Calculations are:

11.72/10.32= 13.57% (higher)

12.65/ 11.72= 7.94% (higher)

13.57 + 7.94= 21.51

21.51/2= 10.75

Note in the calculations that as we get closer to future expiration, the front number gets small and smaller (because eventually front month should converge to Spot VIX price) and so will your ratio. Day after future expiration, the number will jump.

Thus, I prefer just to watch the difference between front month future and second month future

Either way, as long as Spot VIX stays below 11, we are in strong contango and SVXY will rise.
5 Jul 2014, 03:36 PM Reply Like
• Author’s reply » Spot on RJL!
5 Jul 2014, 03:49 PM Reply Like
• mirko78
, contributor

hi RJL1955 , thank you, today R is 7,322,
now about other step, how to calculate historical average R?
on how many days you calculate average R ?
you calculate all on excel ?
7 Jul 2014, 09:08 PM Reply Like
• markrpat
, contributor

I couldn't resist putting spreadsheet together this weekend. Just to share, pulled data down from here: http://bit.ly/1qFrDvZ
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/F1-1)*2(for 2x)/20(trading days)*100. Hopefully collaborative effort will help. GL.
7 Jul 2014, 10:31 PM Reply Like
• markrpat
, contributor

addtl. note: spot vix is only updated through May. Had to enter the rest by hand. UVXY decay calc obtained through SA article "how uvxy and svxy would have....." june 3, 2014, by Nathan Buehler. Thanks Nathan.
8 Jul 2014, 12:09 AM Reply Like
• Interested18
, contributor

Thanks for posting the amended strategy as discussed. Any chance you can show the historical trades for this strategy? Would like to see how often it turns and how long the trades are. Thanks
7 Jul 2014, 11:12 PM Reply Like
• markrpat
, contributor

Interested18, assume comment intended for me, if not pls. disregard. I've been following Macro on this subject, so thanks go to him, and others in the thread (especially RJL1955). I don't offer an amended strategy, his looks good to me. I just wanted to share my effort. Note that the data and calcs can be applied to more than CBOE .SPX VIX. Can be applied to other VIX indices/products as well, but haven't tried it yet. For the record, I've been screwed blue and tattooed when I got ballsy with UVXY. That's my primary motivation.
7 Jul 2014, 11:25 PM Reply Like
• markrpat
, contributor

Hope the thread is still alive. Based on my calcs, backwardation instances where R < -1*R(average) occurred only 7 days in last 320 averaged trading days(Rave 320=6.25), and 7 days in last 250 averaged trading days(Rave 250=6.06). Clusters were 2/6-2/10, 2014 (3 daily occurrences) and 10/10-10/13, 2013 (4 daily occurrences). So if my calcs are correct, these "long \$UVXY triggers" are outliers, and backwardation is indeed short lived. The exercise was worth it for me, plus helped revive some of my excel skills (if correct). Hope my math works.
10 Jul 2014, 09:54 PM Reply Like

This is the naked truth. Unless you have a 2007-2008, or a 2011, where the whole world is going to end, you should always buy and hold SVXY and forget about it. Now, I have been investing for about 20 years. Unfortunately, I have seen two bad crashes, and I have heard about 1987 as well. It is for those periods that this strategy works. The good news is that it gives very few false warnings. It will mostly keep you fully invested in SVXY, which is what anyone should do. But when the crash happens, it will move you into UVXY.

Now, this is backward lookign and there is no proof that this will keep working in the future. However, at least it has some logical base (high backwardation is bad for SVXY by definition) and is not a pure momo TA indicator, which never work.
10 Jul 2014, 10:16 PM Reply Like
• markrpat
, contributor

Well, I had to proof some of the history, as an exercise. Like you say, naked truth-wise, it's a no brainer if you risk manage the account. At least now I have a pretty good spreadsheet, and can play with lots of graphs...as I like to trade more often. Thanks Macro.
10 Jul 2014, 10:42 PM Reply Like
• fritz68
, contributor

Many of you will be familiar with it but there's a freely downloadable article entitled 'Easy Volatility Investing' where the author has compared various strategies for trading XIV/UVXY. By far the best is a strategy based on spot VIX in relation to 10-day historical vol (smoothed by a moving average), followed by a VIX/VXV (again smoothed by incorporating 10day ma).

http://bit.ly/10wNbK7

But Macro's straddle still comes out top with respect to historical returns and is easier to set and forget. 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.
11 Jul 2014, 06:43 AM Reply Like
• Prey4Crash
, contributor

fritz
"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."

hmm, I think the returns generated from assuming an IV on the straddle options at 53% are more than highly suspect. Especially in the years after some people thought the financial world was going to end. (Do you really think you could have bought svxy options (expiring jan 2010) in jan 2009 for a low low price of 53% IV?
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 (friday-monday 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.

1) One may certainly be unbiased as to direction but one is still going to be hugely affected by timing the cost of the options as determined by their IV.
11 Jul 2014, 10:20 AM Reply Like
• Author’s reply » Trouble is, even for VXX the first January for which I can get IV prices is 2010. So, I can't definitely say which way IVs will go. For Jan 2010, 2011, 2012, and 2013, the IVs were all 67-70%.
11 Jul 2014, 10:45 AM Reply Like
• Prey4Crash
, contributor

Macro I appreciate your effort here because contemplating the differences in your strategies returns with respect to the different market environments has helped.

Obviously you're run the returns using IV of 70% on the options .
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.
11 Jul 2014, 11:53 AM Reply Like
• fritz68
, contributor

Prey4Cash, but we're not in Jan 2009, we're in July 2014, a low volatility environment, and we're discussing strategies we'd enter today. I was referring to fact you don't need to wait, indefinitely, for SVXY/XIV to tank and VIX to spike to enter a long position.

You wrote earlier the success of a long straddle is simply the difference between IV at purchase and sale. On the contrary, the success of this trade (if entered today) is dependent on movement of SVXY, upwards, irrespective of IV, whereas the put is primarily to cut losses should the market tank.
11 Jul 2014, 11:00 AM Reply Like
• Author’s reply » Note that since I used the same IVs start and end of trade, the straddle value is NOT the differene of the two IVs, which is 0. fritz explained it perfectly. The put is just to protect the case of a market collapse. The call is where the money is.
11 Jul 2014, 11:03 AM Reply Like
• Prey4Crash
, contributor

fritz:1) Prey4Cash, but we're not in Jan 2009, we're in July 2014, a low volatility environment, and we're discussing strategies we'd enter today. I was referring to fact you don't need to wait, indefinitely, for SVXY/XIV to tank and VIX to spike to enter a long position.

1) That's an entirely different question. I'm addressing the validity of his past simulated returns.

2) Yes today is an excellent time to lock in insurance on protective puts going forward.
11 Jul 2014, 11:53 AM Reply Like
• Author’s reply » Today is also an excellent time to buy calls. As for the validity of the past calls, I have posted results with 70% IV (as in the last 4 Januaries) and they are just as impressive. Even at 80% IV the results are 50% gain annually. 90% IV gets the results to 35% gain, matching that of holding SVXY straight up.
11 Jul 2014, 01:33 PM Reply Like
• fritz68
, contributor

I'm now using a slightly different approach than what I had (long SVXY, long-dated ATM put) and gone for debit call spread Jan 2016 Jan 120/125 that I paid \$1.60 for.

Thinking is that I leave unless there's a major spike in VIX, at which time I sell short calls once futures have turned from backwardation to contango, repeat as necessary (based on how close to expiry). Has some weaknesses as do all timing techniques but reasonably limited losses and reasonable upside potential.

PS Macro, I noticed you trade miners, may I ask if you're long or short? I have a short DUST position I sell GDX calls against (and short TMV position I sell TLT calls against).
11 Jul 2014, 04:00 PM Reply Like
• Author’s reply » No longer following miners now. Basically not following anything really because work is killing me. I just came back for summer for a few weeks and will be gone soon. Sorry!
11 Jul 2014, 04:32 PM Reply Like
• mikeginn
, contributor

Ok, bought SVXY puts a few days ago and equal amount of SVXY calls today. Total cost was only about 25% of my long SVXY position, so have more room to add to these next week.
11 Jul 2014, 05:13 PM Reply Like
• OmDoc
, contributor
Comment (1) | Send Message

Macro, I have been following U since 2013 and read all your articles and innovative strategies.

I had a question regarding the NEW SVXY Strategy for my own education:RJL1955 explains nicely in one of his comments on how to correctly calculate current R, but how is the Average Historical R calculated or derived? --I can't seem to figure this out.

Additionally, I am assuming that this strategy is balanced every Jan. as you mention in your Report with options , and either buying the SVXY or UVXY ETF based on the calculated CURRENT R, AND NOT adjusted thru the year( i.e. changing ETF's based on contango or backwardation) until the next Jan.

28 Jul 2014, 08:55 PM Reply Like
• Author’s reply » To calculate the average I took the running average from day 1 of the simulated SVXY to the day of the trading. This strategy is a live day to day trading strategy, which I created because I wanted to know how I would navigate the VIX waters should another 2007-2008 hapen. My regular strategy is trade once every year option strategy.
28 Jul 2014, 10:39 PM Reply Like
• jfairfax
, contributor

Hi to all. just found this string,hoping it is still active.
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?
14 Aug 2014, 07:40 PM Reply Like
14 Aug 2014, 08:56 PM Reply Like
• Macro, thanks for posting. Pardon my question here, but my options fu is only on a mid level and I'm trying to understand that portion of the strategy. I understand the basic S version and my own strategy and calculations for SVXY agree with yours (long mostly, except when you go into heavy backwardation).

When you're buying the strangle, are you targeting a specific IV (you mentioned 60% - 70%) or a specific strike (you say 30% - 40% out of the money in the main body)?

Can you describe the typical profit scenarios here? Obviously, if things are just rolling along nicely, with futures in contango, then SVXY is growing, your puts are decaying, but what would you expect to be happing to the OTM calls? Given the high cost of SVXY options (because of high volatility), do you expect that the calls will make money, break even, or lose? To get the high rates of return, I assume they have to make money, since they are 37.5% of the portfolio every year and SVXY growth alone isn't enough to return that.

Conversely, if you're suffering a huge economic shock (2008 or 2011), then I assume the puts shoot up in value (disproportionately, since SVXY is biased to grow upwards), plus you switch to UVXY to give you some growth as SVXY is tanking.

Finally, what's the sales strategy for the options? Do you simply hold them to expiration, or would you try to liquidate the puts, for instance, during a price shock, pocketing the gain, and possibly rebuying them when volatility settles down?

The interest in your strategy is that it nicely caps the drawdown while still returning big numbers.

Thanks!
26 Oct 2014, 10:27 AM Reply Like
• mikeginn
, contributor

I'm guessing Macro is busy with his work life otherwise would be commenting on the recent decent and partial rebound of SVXY.

I'm managing my (now ~4% of entire portfolio) volatility positions in part as experiment and for my own learning about volatility and options in general. 70% is long SVXY, the rest is 2/3 calls and 1/3 puts -- puts split between SVXY and SPY. The calls and puts are all Jan 2016.

I've held my long position through the recent backwardation of the VIX structure and fall in price. I'm convinced that as much as I wish for one there just isn't a SVXY trading model based on the VIX structure which will be useful in automating trades in and out of SVXY.

However, I did a rebalancing of sorts a few weeks ago, adding 50% of shares to my long and also selling about half of my puts to buy close in calls which I felt had better value than more out of the money ones. I did the rebalancing guessing that the SVXY dip was near a bottom, supported by Gilluli's article http://seekingalpha.co... . He made a good case that unless we are entering another 2008 type meltdown that the VIX top was in or close to it. So far so good. Like you I am not yet clear what the end games for the options are.

Best of luck ReadyTrader and all those following Macro as a volatility muse.
28 Oct 2014, 01:03 PM Reply Like
• Thanks, mikeginn.

When did you buy the original options and how were they looking in terms of profit when you sold the puts?

What I'm trying to understand (was trying to look at this using historical tools on Thinkorswim) is what to expect under various scenarios. Given the position described, I would assume that the long SVXY position forms the core of the engine. The puts are there to hedge the downside. If you don't sell them, they resist the draw-downs (they should greatly increase in value both because SVXY is falling (delta/gamma gains) and increasing in volatility (vega explodes upwards)), but if you hold them to expiration, they're typically going to be worthless (assuming SVXY is doing its "normal" thing of trudging upward).

Where I'm having trouble is with the calls. I would expect that since SVXY upwards growth is fairly predictable (it's the downside that explodes out of nowhere and kills you) that call options would be appropriately priced for the call writers to make money in most cases (call writers are not stupid and they can see how SVXY performs). The only time that SVXY jumps upwards is when it's reverting back to the mean following a short-lived downward jump.

In other words, under most normal circumstances, I'd expect the calls to expire worthless, too, otherwise the call writers are stupid and aren't charging enough. But if that's true, why put 37.5% of the SVXY investment into calls? Why not just go SVXY long and then buy enough puts for downside protection?

But then you can't get the ~500% gains that Macro is showing 2009, 2010, and 2012 without some sort of option kicker. SVXY alone won't do it for you (unless you have some amazing timing strategy, which I think is a unicorn).

Anyway, I'm trying to figure out how to confirm Macro's analysis with one of my own, but historical options positions are always difficult to model.
28 Oct 2014, 04:22 PM Reply Like
• RJL1955
, contributor

I have correspondent with Macro over the years and can shed some light on the option strategy.

The calls are leap calls. SVXY can go up by about 100% per year (absent any black swan events) and buying leap calls that far out of the money (40%) will still allow your calls to be in the money at the end of the 1 year period.

Thus the large gains (over 100% per year), when SVXY has a nice yearly run (like the last 2 years).
28 Oct 2014, 04:34 PM Reply Like
• Thanks RJL. Makes sense at some level, but it still seems like the call option sellers are miscalculating something. SVXY is largely predictable to the upside, and horribly unpredictable to the downside (the proverbial "picking up \$100 bills in front of a steamroller"). It NEVER explodes upwards.

But that said, if they consistently mis-price them, we can all take advantage.
29 Oct 2014, 02:03 PM Reply Like
• RJL1955
, contributor

The gains Macro showed was when we were in a state of contango (for almost all the year).

When Contango is small, or when we were in backwardation, is when the gains suffer

Just an FYI
29 Oct 2014, 02:56 PM Reply Like
• Does contango affect the options piece much? Certainly the long SVXY piece, as that's how SVXY generates most (all?) of its long-term gains. And certainly when futures are in contango, SVXY should be achieving good gains.

I'm struggling with how that impacts the call options, though.

Most options expire worthless. That's why option writers do it. If that wasn't the case, nobody would get themselves into a capped-upside, unlimited downside position (the definition of selling an option). So if SVXY returns big gains on calls with reasonable regularity, that seems odd.

BTW, it's not that I disbelieve that it happens or that I'm trying to be petulant. I've just learned that every time I spot a free lunch in the market, that's typically a mirage. ;-)
29 Oct 2014, 07:09 PM Reply Like
• RJL1955
, contributor

Most call leap writers would be very happy with a 35-40% yearly return. That is why they are writing them.

A steady dose of contango during the year though can achieve gains over 100% per year (look at 2012 & 2013). However, years that we have large bumps in the road, or backwardation can drastically reduce the yearly gain (look at this year as an example).

Wen buying the options, if the prior year produced a very good return, the call options would be more expensive and thus slightly reduce any future gains.

Finally- there is no free lunch. Look at how this would have performed year to date. Both the calls and puts bought (and held) on 1/1/14 would be worth a lot less now nad you currently would be down quite a bit.
29 Oct 2014, 11:10 PM Reply Like
• OK, fair enough. So it all amounts to the volatility of SVXY itself, which is high (vol of vol). If you're an option writer, you're betting that you'll be able to exit sometime in the next year at a good profit during some sort of volatility event. The long term of the LEAPs make that more probable.
30 Oct 2014, 08:47 AM Reply Like
• I finally found a site that has some reasonable options history: BigCharts.

SVXY started 2014 at 66.49. If you go down 30% from that for the put, you end up with a strike of about 46. The 45 puts for Jan 2015 looked like this:
http://on.mktw.net/1p6...

which is about what you'd expect. The puts erode most of the year and then spike in Oct with this recent volatility hit (incidentally, mikeginn, you probably did the right thing by selling when you did).

If you go up 30%, you end up with calls at about 86. The 86 calls for Jan 2015 looked like this:
http://on.mktw.net/1p6...

There isn't much action until mid-year on the calls. Then they fall pretty quickly as SVXY stumbled in the summer.

With SVXY basically right back where it was at the beginning of the year, this is the best-case scenario for the option writers, and the worst case scenario for the strangle buyer.

If SVXY just bounces around for the next bit (which is unlikely -- it will go one way or another), then the exit scenario is basically:
SVXY: 50% of portfolio = flat
calls : 37.5% of portfolio = complete loss
puts : 12.5% of portfolio = complete loss

So, your portfolio is down 50% overall if the year ended today. But you could have made a lot of money at various points in time on the options if you had chosen to exit (e.g., sell the calls in July and the puts in Oct).
30 Oct 2014, 09:21 AM Reply Like
• mikeginn
, contributor

thanks very much, this makes things very clear.
mike
30 Oct 2014, 01:47 PM Reply Like
• mikeginn
, contributor

and that's just the tricky part, knowing when to sell -- either your longs or your options. I sold the puts knowing they were supposed to be held to protect against a black swan. better lucky than good on that trade so far. however, my options positions are still down ~20% since mid year purchase, and my longs are about even. so yes, no free lunch. this might not be a good year for most SVXY strategies, I'd guess. If anyone has been following strategy S as in the original post by Macro, it would be great to hear a contrasting (good) outcome.
30 Oct 2014, 07:36 PM Reply Like
• Yes, it's always better to be lucky than good. ;-)

But that said, I prefer a systematic approach, with back-tested rules, based on a sound theory of how the market should work (which it never quite does). I've found that I'm not a good trader when I use my intuition. I can frequently make a good buy, but they I get caught up in the fear and greed cycle and I typically sell at the wrong time. I have wins and losses, but when trading intuitively, my losses greatly outweigh my wins.

One of the greatest pieces of advice that I got from a trading book (can't remember which) is that it's fine to have a loss for all the right reasons. In other words, if you're following your tested system, you'll inevitably have a loss from time to time. That's part of the game. But the winners will have a winning system and be following the rules throughout.

Which is why I'm interested in the various outcomes that can happen with Macro's approach. Hey, if you're statistically able to get 400%+ returns two out of three years, then a flat year, or even a 50% down year, is mathematically no biggie in the long run (though gut-wrenching in the short run). You just need to be convinced that you still have a positive trading expectation in the long run.

Good luck!
31 Oct 2014, 10:45 AM Reply Like
• mikeginn
, contributor

RJL1955,

That sounds about right given my understanding. Thanks for commenting.

I have gone outside the model macro proposed above by ignoring his S calculation (a bit too difficult and time consuming for me to calculate and constantly update), and by recently rebalancing both the long SVXY by investing more, and by selling puts to buy more calls. That said, here are some real results over the past several months. Very small number of data points, but you understand this and just want to see what some options price changes look like, so…

SVXY 01/15/2016 80.00 P
purchase puts 7/3/2014 20.60
sold some puts 10/15/2014 37.00
value 10/28/2014 26.70

SVXY 01/15/2016 85.00 C
purchase calls 7/11/2014 27.14
value 10/28/2014 11.42

SVXY 01/15/2016 120.00 C
purchase calls 7/14/2014 17.80
value 10/28/2014 5.10

SVXY 01/15/2016 50.00 C
purchase calls 10/15/2014 15.79
value 10/28/2014 26.80

Now looking at the numbers I see that I have some thoughts, which I will share tomorrow.
28 Oct 2014, 10:27 PM Reply Like
• Thanks, Mike. That helps a lot. Your calls are obviously suffering because you purchased the 85s and 120s right before the market fell off the cliff. Conversely, your puts did well.
29 Oct 2014, 02:03 PM Reply Like
• RJL1955
, contributor

Mike:

Macro is a strong believer of letting the options run for the entire year and not rebalance.

Just an FYI
29 Oct 2014, 10:48 AM Reply Like
• mikeginn
, contributor

ok. great to know. I'll undo the options rebalancing soon.
29 Oct 2014, 01:20 PM Reply Like
• yichzhang2
, contributor

hi Macro, I test this model these days and found that if we buy SVXY only when average contango > 5.3, we can get the highest sharpe ratio. Also, from doing so we get rid of using option.
21 Jan 2015, 07:49 AM Reply Like
• yichzhang2
, contributor

Also, I tested ZIV and found that if we simply buy-and-hold ZIV, we could get a better sharpe ratio than S and SO. Buy-and-hold ZIV only triggered the put option once on 2014-12-30 when ZIV decreased by 50%, however, on 2014-12-31, ZIV doubled and recover the loss.
21 Jan 2015, 09:29 PM Reply Like
• ianxponent
, contributor

I would think you'd want to buy SVXY when VIX is in backwardation not contango >5.3.
22 Jan 2015, 11:19 AM Reply Like
• yichzhang2
, contributor

I mean R>5.3, This is also a sign of VIX contango
23 Jan 2015, 01:39 AM Reply Like
• Wes P
, contributor
Comment (1) | Send Message

This looks a bit old, but I thought I would ask as I am new to this but find it really interesting. For those of us who don't have a lot of time, what kind of return could you get by selling put leap options 40 or 50 % OTM on the vix in times of high volatility, say vix over 20 or whatever, during this time frame. Basically just set and forget kind of deal?? If you get put the the stock, wouldn't that even be better?
24 Mar 2015, 01:52 PM Reply Like
• Toofuzzy
, contributor

Wes

You can NOT get put the VIX . The vix is only an index unlike uvxy, svxy, vxx, etc

Toofuzzy
17 Aug 2015, 12:14 PM Reply Like
• Toofuzzy
, contributor

Macro Investor

Can you please fix the formular in the article

R = ( F1/V , F2/F1 ) -1

Should it be
R = ( F1/ + F2/F1 ) -2

So replacing comma with +
And replacing -1 with -2 like you agreed to in prior post ?

Also how often do you check to update, daily weekly, monthly, or is there a way of just looking at vix central visually daily because you would be able to see a necessary change on the chart, and the do the calculation.
17 Aug 2015, 12:25 PM Reply Like

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