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  • Simpler SVXY Strategy 46 comments
    Jul 4, 2014 11:51 AM | about stocks: SVXY

    I had earlier posted a strategy which combined SVXY puts and calls and a SVXY/UVXY combo strategy. I was asked what the returns would be if the SVXY UVXY combo strategy was replaced with pure SVXY, so that the strategy would be in autopilot with one annual rebalancing each year. This is for someone who doesn't have time to watch the markets (and I completely understand that, as I am drowning in work myself). Here's the updated Strategy:

    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 SVXY.

    Average annual return from Jan 2005 to Jan 2014 is ~125%. Max annual drawdown is -48%. Strategy returns by year

    Year Return
    2013 84.2%
    2012 504.1%
    2011 -48.3%
    2010 526.7%
    2009 501.1%
    2008 -3.0%
    2007 -17.4%
    2006 198.0%
    2005 183.0%

    So 3 down years and some massive up years.

    Disclosure: The author is long SVXY.

    Stocks: SVXY
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Comments (46)
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  • bbro
    , contributor
    Comments (11195) | Send Message
     
    Correct me please..but wasn't the inception date for SVXY
    and UVXY October 4 2011?? If so is the earlier data based on the VIX historical data?
    4 Jul 2014, 01:23 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » That is right. It's simulated using VIX futures.
    4 Jul 2014, 01:54 PM Reply Like
  • bbro
    , contributor
    Comments (11195) | Send Message
     
    Thanks.
    4 Jul 2014, 04:27 PM Reply Like
  • gmarceau
    , contributor
    Comments (63) | Send Message
     
    Macro, any idea how much worse off one would be by just rebalancing once a year or only using puts?

     

    I think Vance Harwood had a backtest from 2004 where $1000 in XIV grew to over $16k by simply holding. Of course it would take balls of steel to ride out the drawdowns.

     

    Thanks
    4 Jul 2014, 01:46 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » That is correct. If you initiated a position in XIV on 3/26/2004 (when vix futures started trading), and held it till 3/25/2014, $1000 would grow to $15,500.

     

    The simple strategy is rebalancing once a year, SVXY+call+put. That's 125% average annual return, so $1000 would grow to $3.3M. Average drawdown is -48% though.

     

    If you eliminate the call, and buy 12.5% in put and 87.25% in SVXY alone, the average annual return is 51%, Max annual drawdown is -26%, and $1000 grows to $58k.
    4 Jul 2014, 02:00 PM Reply Like
  • gmarceau
    , contributor
    Comments (63) | Send Message
     
    Much appreciated! Would love to see a ZIV article from you someday.
    5 Jul 2014, 01:24 AM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    Nice. And if you simply sold SVXY and the SVXY calls sometime in July when the Debt Ceiling heated up and bought back in November for the Santa rally you are way up on the year. I think one "trade" in 9 years on a big event everyone knew about seems reasonable :)
    4 Jul 2014, 02:02 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Rock, Another one of those could be coming if the Republicans take the Senate. They will try their best to roll back Obamacare. I suspect they will try to make the US default through another debt ceiling crisis. So we buy VXX calls in advance, and then then the dust settles switch to SVXY calls and make out like bandits.
    4 Jul 2014, 02:06 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Macro:

     

    I could see the VIX rising about 1-2 weeks before election if the feeling is that the Republicans will reclaim the Senate.

     

    As far as the debt issue, I thought this was settled until Feb/March 2015. I agree with you that we do have a good chance of a VXX spike at that time(maybe starting about 2 weeks prior).

     

    These events should be carefully watched for all of us that are short on the volatility side.
    4 Jul 2014, 03:36 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » We will play both! If Republicans give, it will be a crime not to take.
    4 Jul 2014, 03:53 PM Reply Like
  • ianxponent
    , contributor
    Comments (737) | Send Message
     
    I suppose it would be some solace for the tea party taking over the Senate. ;)
    5 Jul 2014, 03:45 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Just think about how many more false crises we will get over the years as long as there is a Dem President and a Tea Party controlled Congress?
    5 Jul 2014, 03:50 PM Reply Like
  • Rock228
    , contributor
    Comments (845) | Send Message
     
    I hope there is another made up political crises, lots of money to be made there. Red team or blue team it makes no difference - they are two sides of the same coin.
    5 Jul 2014, 10:40 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » When it comes to making money I will take any manufactured crisis. It's just that the Red team are masters at that.
    5 Jul 2014, 11:46 PM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Looks like we got our wish. Will you post when it is time to act? Thanks!
    5 Nov 2014, 01:40 PM Reply Like
  • Aqua Vitae
    , contributor
    Comments (8) | Send Message
     
    Macro:
    If the investment is based on the premise that the price of SVXY is going to change significantly, why not just buy a Reverse IC, will it be a good strategy?
    4 Jul 2014, 05:50 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » You have to explain to me what you mean by reverse IC.
    4 Jul 2014, 06:26 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Reverse Iron Condor

     

    Works well when you have a stock like SVXY that moves a lot.
    4 Jul 2014, 07:49 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Ah gotcha, but then you are limiting your upside.
    4 Jul 2014, 09:37 PM Reply Like
  • c4063a2
    , contributor
    Comments (8) | Send Message
     
    Hey Macro,

     

    I just love reading your stuff on this SVXY/UVXY strategy. I had a small investment in straight up SVXY shares based on one of your previous strategy's and I made a nice little profit only to get out of it this spring(watching too much CNBC and other media types who keep predicting a 10% - 15% pullback being inevitable - ain't happened yet, so I've missed out on a good run-up) and now I'm looking for an opportune time to get back in.

     

    Let me use an example and you tell me if I'm going in the right direction. If I were to put on this trade on Monday with about 20K, would it look like this (this is meant to be approximate and prices were taken from Yahoo)?

     

    Buy 100 shares SXVY .........................
    Buy 5 JAN15 65P (approx 30% OTM ASK 5.20) ... $2600
    Buy 20 JAN15 125C (app 40% OTM ASK 3.80) .... $7600

     

    And come January 2015, I would close out the options and perform the same calculation and go into the JAN 2016 CALL and PUT options.

     

    Again, thanks for all the articles and in depth research.....keep it coming.

     

    John
    5 Jul 2014, 07:00 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    John:

     

    The concern I have (and Macro mentioned it before), is that the January 2015 is not a full 12 months from todays date.

     

    Being 6 months away, maybe you drop the put spread to 15% (from 30%) and the call spread to 20%

     

    I will be interested in Macro's thoughts on your question and mine.
    5 Jul 2014, 07:32 AM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » It is very hard to predict 6 month out VXX/SVXY prices. However, at best my model shows a $130'ish end year price for SVXY. At best.

     

    It's more like $120 range. Given that, I myself wouldn't buy that far out calls. I have some 100's, 102.5's, and 105's but that's it for me.
    5 Jul 2014, 06:33 PM Reply Like
  • c4063a2
    , contributor
    Comments (8) | Send Message
     
    Thanks Macro and RJL....I will look into that.

     

    So on the PUT side, I'm looking at something around the JAN15 80P, I guess.
    5 Jul 2014, 09:30 PM Reply Like
  • c4063a2
    , contributor
    Comments (8) | Send Message
     
    Ooops.....something got left out....should be

     

    Buy 100 shares SXVY ....$9270
    5 Jul 2014, 07:02 AM Reply Like
  • Fred Piard
    , contributor
    Comments (1097) | Send Message
     
    I just had a look at VIX futures. Is there a computer glitch at CBOE or do I miss something?
    http://vixcentral.com
    http://bit.ly/v8FEJ5
    5 Jul 2014, 05:15 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Computer glitch because of the holiday.

     

    Monday will show accurate numbers.
    5 Jul 2014, 05:18 PM Reply Like
  • Fred Piard
    , contributor
    Comments (1097) | Send Message
     
    thanks RJL
    5 Jul 2014, 06:01 PM Reply Like
  • Fred Piard
    , contributor
    Comments (1097) | Send Message
     
    Values are accurate on CBOE quote page now (in case someone else need them for weekly closing contango calculations):
    http://bit.ly/v8FEJ5
    Not yet updated on Vixcentral.
    6 Jul 2014, 09:25 AM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    Thanks Fred

     

    Keep on writing your good articles.
    6 Jul 2014, 09:41 AM Reply Like
  • c4063a2
    , contributor
    Comments (8) | Send Message
     
    Macro:

     

    If a person had an account where options are not allowed, is there a strategy using SVXY that you're aware of that might provide some defense against a market set back, say something like 75% SVXY and 25% VXX where the individual doesn't have to worry about trading in and out. I've seen what can happen to UVXY so holding some of that wouldn't be an option. Maybe in conjunction with SPXU? Anyway, your expert opinion is appreciated. Thanks.
    6 Jul 2014, 05:51 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » That's a tough one. I wouldn't hold VXX or UVXY. They will erode quickly while SVXY gains and pretty soon the portfolio would be nearly all SVXY again. Since options are not allowed, and you do not want to trade in and out, the only thing I can think of is holding cash and SVXY. Sorry, that's about the only way you can hedge SVXY.
    6 Jul 2014, 06:45 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    John:

     

    I have that issue with one of my accounts also.

     

    You may want to revisit a message I posted on another one of Marco's articles. It is:

     

    Contango over 7%- stay fully invested in SVXY

     

    Contango 5% and dropping- scale back some and get ready to sell out of the market if this continue (this happened a lot in the first quarter of this year)

     

    Contango 3% or less- go into cash

     

    Contango- (5%). Move into UVXY

     

    These are just my guidelines and I can adjust them depending upon economic and political situations.
    6 Jul 2014, 07:08 PM Reply Like
  • c4063a2
    , contributor
    Comments (8) | Send Message
     
    RJL

     

    If I look at vixcentral to check contango, should I be using the F1-F2 Contango value (and I assume you're checking this on a daily basis) or is there a better place to get this value (like CBOE)? Thanks again.
    6 Jul 2014, 08:03 PM Reply Like
  • RJL1955
    , contributor
    Comments (401) | Send Message
     
    John:

     

    On VIX Central, always use the first two months shown (in this case July and August).

     

    On CBOE website, always use the two months below the spot VIX

     

    Right now:

     

    July is 11.80
    August is 12.75

     

    Contango is 12.75/11.80= 8.05%

     

    Bullish for SVXY. However, note that their is a 5 week period between July future expiration and August future expiration. Thus, the 8.05% is not strongly bullish (for 5 weeks I would want to see 11%, for 4 weeks 8-9% is strongly bullish)

     

    Yes, I check this daily (if not more!!!)
    6 Jul 2014, 09:14 PM Reply Like
  • c4063a2
    , contributor
    Comments (8) | Send Message
     
    RJL,

     

    Thanks again for you help and suggestions.
    6 Jul 2014, 09:56 PM Reply Like
  • c4063a2
    , contributor
    Comments (8) | Send Message
     
    Thanks Macro and RJL for both your replies.
    6 Jul 2014, 07:47 PM Reply Like
  • mirko78
    , contributor
    Comments (10) | Send Message
     
    The simple strategy is rebalancing once a year, SVXY+call+put. That's 125% average annual return,

     

    if we balance once 6 months this strategy,

     

    puts with strike 15% out of money,
    calls with strike 20% out of money.
    Put 12.5% of entire portfolio in puts, 37.5% in calls, and the remaining in SVXY

     

    performance always positive ?
    8 Jul 2014, 05:21 AM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Haven't modeled that. But given the volatility in these things I don't like a 6 month strategy.
    8 Jul 2014, 12:50 PM Reply Like
  • ikkyu
    , contributor
    Comments (291) | Send Message
     
    Greetings,

     

    I really appreciate the spirit of you posts and your ongoing encouragement.

     

    I am a bit of a simpleton. I don't understand why you would buy puts, calls, and the underlying. I could understand why you might buy calls or the underlying plus puts (even if they are about the most expensive options traded), but not why you would buy both, as they are synthetic equivalents.

     

    Cheers from Osaka,
    john
    13 Jul 2014, 09:00 AM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » IT's because SVXY can make sharp moves both up and down. If you buy both puts and calls then you are covered for both sides. Since a put and a call can only have max 100% loss, but unlimited gain, they don't cancel each other out.

     

    Of course, it is not just that simple, as if SVXY stays relatively flat you lose botht he put and the call. I don't want to get into the details of options trading here. But you should read the options strategy books and paper trade for a while before you try any of the options strategies.
    13 Jul 2014, 11:57 AM Reply Like
  • bobtcat2
    , contributor
    Comments (1933) | Send Message
     
    Macro,

     

    This is a very interesting strategy. I have been stupidly selling naked calls on VXX periodically the last few years and while the profits have been good, they have not matched the back tested results and of course the risk of loss is incredible (lost 6% of my account last week).

     

    Have you actually been using this SVXY strategy? I saw you mentioned there would be a problem if SVXY were flat for a year but that seems an unlikely occurrence. And your back testing already accounts for this, correct? Also how does the model estimate the price you would pay for the puts and calls? I have seen the bid/ask on those things is insane. Anyway, those are some incredible numbers. If you're using this, what % of your account goes in this type of trade every year? Do you just hold the options to expiration? Sorry for all the questions! After this past week I've finally realized the incredible folly of selling VXX calls and looking for an alternative. I just hope the performance of these products wasn't an artifice of Fed involvement in the markets.
    2 Aug 2014, 09:01 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » I lost 25% of my account last week. It comes with the territory.
    4 Aug 2014, 08:19 PM Reply Like
  • jakurtz
    , contributor
    Comments (1959) | Send Message
     
    Come on Macro, dont u have any mojo for me? My VXX puts are look'n nasty.
    6 Aug 2014, 05:33 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Oh man, I took a licking too!
    8 Aug 2014, 08:53 PM Reply Like
  • 3Siamese
    , contributor
    Comment (1) | Send Message
     
    Macro,

     

    Is there a reason for starting in January or could you theoretically start any month and use the same method (options 12 months out) and expect similar returns?
    16 Aug 2014, 02:53 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Not sure. Only ran the model for january. But it should really be run for each quarter. I just ran out of time.
    16 Aug 2014, 06:14 PM Reply Like
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