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  • Long Straddle On SVXY 39 comments
    Jul 6, 2014 10:24 AM | about stocks: SVXY

    Just tested the effect of a long straddle on SVXY.

    Time period: Jan to Jan (1 year)

    Strike: At the Money

    Put share: 50%

    Call Share: 50%

    IV: 53% (the current one)

    Average annual return from 2005-2014 : 120%

    Max annual Drawdown: Amazingly, this strategy is not down even a single year.

    Year Return
    2013 58.1%
    2012 290.8%
    2011 0.5%
    2010 303.3%
    2009 289.1%
    2008 76.1%
    2007 52.0%
    2006 121.2%
    2005 112.8%

    If I increase IV to 60%, average annual return is 95%, and max annual drawdown is -11%.

    This is as lazy as a strategy can be. Basically no thinking involved.

    Disclosure: The author is long SVXY.

    Stocks: SVXY
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Comments (39)
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  • VTH
    , contributor
    Comments (630) | Send Message
     
    Just Follow this strategy, and not follow the CNBC corrections non-sense.
    6 Jul 2014, 10:28 AM Reply Like
  • OwnPuts
    , contributor
    Comments (24) | Send Message
     
    SVXY Inception Date 10/3/11.
    Where did you get the underlying and options data for your calculations prior to the inception date? Will you share the data for review?
    6 Jul 2014, 01:20 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » I calculated the SVXY from past vix futures. You can see a similar methodology here.

     

    http://bit.ly/1mPJA7i

     

    For the options pricing I used black scholes. Parameters in article.

     

    I would much appreciate if someone can replicate the results.
    6 Jul 2014, 01:22 PM Reply Like
  • ianxponent
    , contributor
    Comments (749) | Send Message
     
    Presumably IV fluctuates over time. Do we know how typical a value today's 53% is?
    6 Jul 2014, 02:41 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Ranges from 50 to 120. Essentially useless for any prediction.
    6 Jul 2014, 02:51 PM Reply Like
  • Prey4Crash
    , contributor
    Comments (168) | Send Message
     
    < Author’s reply » Ranges from 50 to 120. Essentially useless for any prediction.>

     

    Could you add a little more detail on how you assumed the IV on the pricing of those option contracts or how one could guesstimate using historical IV of related known contracts
    (corresponding spy IV)?
    10 Jul 2014, 07:20 AM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Well, the SPY IV is the VIX more or less. There is really no cooreleation between VIX and SVXY IV. I mean, you are taking the volatility of volatility here. That's not just unpredictable. That's is a complete random maze of false turns.

     

    So, I ran it for 53% (current IV), 60%, and 70%. More than 3/4 of the time the IV is less than 70%.
    10 Jul 2014, 01:17 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » You can download the IVs from ivoaltility.com and see for yourself.
    10 Jul 2014, 01:18 PM Reply Like
  • RJL1955
    , contributor
    Comments (402) | Send Message
     
    Macro:

     

    Thank you for the analysis on the 3 trading strategies (long straddle, options & SVXY, options & svxy/uvxy)

     

    I compared these side by side to see which years the returns were the best and then tried to analyze why. This is what I found

     

    Straddle worked best in 2007 & 2011

     

    All other years, the options + svxy or options + svxy/uvxy were the best. These two different strategies had very comparable returns with the exception of 2008 (options + svxy returned -3%, while options + svxy/uvxy returned 291.9%. This was because of the terrible market and the large backwardation that occurred during that year.

     

    I then looked at the price of the SPOT VIX (I know it tracks futures, but I used the SPOT for this comparison) as of December 31st each year. This is what I found:

     

    12/31/04- 13.29
    12/31/05- 12.07
    12/31/06- 11.56
    12/31/07- 22.50
    12/31/08- 40.00
    12/31/09- 21.68
    12/31/10- 17.75
    12/31/11- 23.40
    12/31/12- 18.02
    12/31/13- 13.72

     

    To me, it looks like when we are having a fairly substantial increase (30% +) in the SPOT VIX, but less than 50% the straddles work the best.

     

    Having increases over 50% of SPOT VIX will cause the puts to gain money and may cause backwardation and thus a move into UVXY (like 2008)

     

    Having a stable SPOT VIX (or even just slightly rising) will have the option + svxy/uvxy outperform the straddle
    6 Jul 2014, 07:23 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Great points all! The key thing to observe in your VIX chart above is that VIX generally stays in the 11-13 range. It was a 5 year period 2007-2011 that had the financial crisis and the very high VIX which pushed the average VIX up, which everyone now claims to be the norm and the current VIX to be low. Truth, though is that VIX of 11-13 range would have bene the norm if we didn't have the financial crisis.
    6 Jul 2014, 07:47 PM Reply Like
  • msoeth
    , contributor
    Comment (1) | Send Message
     
    I'm kind of late to this thread, but there is VIX data back to 1990 (or 1986 if you substitute VXO), and the median value is around 18. Only around 20% of the time has VIX been in the 11-13 range. The strategy has merit, but you need to look at a long view and pay attention to the IV for sure.
    28 Sep, 12:04 PM Reply Like
  • VTH
    , contributor
    Comments (630) | Send Message
     
    I don't know why pundits keeps saying low vix now is seen an impending correction...idiots...... don't back it with anything and just scare people....the above is the proof vix 10-13 is norm on a stable market, 20-40 is for abnormal markets.
    6 Jul 2014, 09:18 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Pundits make money by fearmongering.
    6 Jul 2014, 11:26 PM Reply Like
  • Learner16
    , contributor
    Comments (314) | Send Message
     
    Thank you, Macro, for your articles. This one is very imaginative and thought-provoking. I have never though of that, as I imagined the market makers would be overpricing the straddles.
    7 Jul 2014, 03:58 PM Reply Like
  • Interested18
    , contributor
    Comments (6) | Send Message
     
    Macro, great work again and thanks for each of these strategies.

     

    I am trying to back into your returns, is it possible for you to post your calculated SVXY closing values for each end of year. I used the link you provided above but got slightly different values. Explanation may be that you used the actual expiration date for the options in january and I used the year end value. just wanted to see if I could get the same numbers.

     

    Thanks
    9 Jul 2014, 04:55 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » I used the actual expiration dates. Will post values when I get back to my home computer.
    9 Jul 2014, 05:17 PM Reply Like
  • Prey4Crash
    , contributor
    Comments (168) | Send Message
     
    Wow thanks Macro.
    I don't know that much about options and I haven't fully investigated your approach.
    At first I was fully convinced those low implied volatility's, that far out would be much higher than the mid fifties.
    even ATM jan 16 is in the low 60's.

     

    Correct me if I'm wrong but isn't the profitability of a long straddle essentially dependent upon the magnitude of the difference between IV of purchase and sale?

     

    At what point would IV cost, one year out not be worth it?
    svxy calls expiring july 11 strike 91, IV is at 32.5
    svxy calls expiring in jan of 2015 strike of 91 are at IV 55.3
    svxy expiring jan 2016 closest strike (90)are at IV of 61.6

     

    Like I said I was surprised it was that low but 55.3 is still a 70% premium over 32.5.
    Isn't this IV skew a potential problem?

     

    Also I would assume that buying puts & calls 1 year out means you pretty much are limited to the asking price due to low volume?

     

    I mean in theory it sounds great but I'm having a hard time wrapping my head around what conditions distinguish between making this profitable and which ones make it a lame horse , in practical application.

     

    *note my IV quotes were taken after hours
    9 Jul 2014, 11:48 PM Reply Like
  • Prey4Crash
    , contributor
    Comments (168) | Send Message
     
    macro"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."

     

    ah that makes more sense. I didn't see you were canceling out the pricing of the options like that on the straddle.
    11 Jul 2014, 11:53 AM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » I have a boatload of SVXY Jan 16 strike 125 calls. They are at 13.7/15.4 bid/ask. I am taking the midpoint as fair value, or 14.85. That gives IV of 58%.
    11 Jul 2014, 01:38 PM Reply Like
  • gerr33git
    , contributor
    Comments (18) | Send Message
     
    Macro,

     

    I have used TOS for the determination of SPX ATM IV 350 days out (mean of 20.8% for 9 years from Dec 2004 till Dec 2013) to estimate IV ATM of SVXY, which historically is about 4 times higher. This results in average IV of 83% for SVXY. Returns will be lower as compared to the author’s results. But, nevertheless, it’s a viable strategy. Thank you for your research and bringing it to the attention of volatility investors.
    3 Aug 2014, 10:47 AM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » SVXY IV one year out hasn't been 83% in a long time.
    4 Aug 2014, 08:15 PM Reply Like
  • Prey4Crash
    , contributor
    Comments (168) | Send Message
     
    gerr
    IV of 83% vs 58%
    The impact on returns is huge to put it mildly IMHO, but hey what do I know . I wasn't trained in finance at an elite school.

     

    The concept has merit but the returns reported in the body of the blog post are nothing but pure fantasy.
    3 Aug 2014, 11:04 AM Reply Like
  • gerr33git
    , contributor
    Comments (18) | Send Message
     
    Prey,

     

    This strategy can not be used blindly as any other options strategy, one should pay attention to IVs. I would not be a buyer of the straddle at the end of 2008, then IV of SVXY stood at 146%. End of years 2004, 2005, 2006, 2012 and 2013 were well suited to use the Straddle strategy.
    3 Aug 2014, 11:20 AM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » Basically, if you take out the crash years, the strategy works well. I think a lot of people have been conditioned to think that another crash is right aroudn the corner, and formulate their investment strategy in the prema-bear mode.

     

    Sad.
    4 Aug 2014, 08:17 PM Reply Like
  • jfairfax
    , contributor
    Comments (4) | Send Message
     
    Macro, Thanks for your great info here. What would the strategy of 50% SVXY + 25% ATM calls 25% ATM puts look like? Is this viable. I like the idea of long SVXY with some downside protection to ride out the swings.
    14 Aug 2014, 11:26 PM Reply Like
  • Macro Investor
    , contributor
    Comments (9252) | Send Message
     
    Author’s reply » I am rather underwater at work now. At some point I will run that analysis but totally out of bandwidth now. Sorry man!
    15 Aug 2014, 12:04 PM Reply Like
  • bikeeagle1
    , contributor
    Comments (31) | Send Message
     
    Wow. I just found this interesting chain of comments. Marco, thanks for making all of this available! Were you able to look at fairfax's idea yet?
    10 Nov 2014, 08:46 AM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Macro,
    Are you doing a long straddle on SVXY for 2015? If so, would you post your trades? Also, do you ever post on Twitter?
    Thanks!
    2 Jan 2015, 12:13 AM Reply Like
  • William Andrew
    , contributor
    Comments (53) | Send Message
     
    Would it make a significant difference if you bought your positions on different days. Buy one when the market is up and the other when the market is down. This time of year we get some swings that are fairly predictable.
    2 Jan 2015, 12:20 AM Reply Like
  • Ehoser
    , contributor
    Comments (30) | Send Message
     
    Has anyone looked at a UVXY straddle? If Yahoo can be believed the Jan 2016 ATM puts and calls are incredibly cheap, like 7.10 and 6.75. Bid and ask are 0 so it's hard do see if they are reasonable, and I don't feel like logging in to TOS at the moment.

     

    This would basically be a put play as UVXY *always* drops big over the year (until it doesn't), the calls would just be there to protect you for VIX spikes. Also rolling the ITM options at various price points might be a way to lock in profits. UVXY also has reverse splits as the price goes lower.

     

    Also: There is a slight possibility that SVXY could terminate on a major VIX spike. Does anyone know what would happen to put options in that case?
    19 Mar 2015, 02:30 AM Reply Like
  • UsuallyReasonable
    , contributor
    Comments (3) | Send Message
     
    Very interesting. One thing this strategy proposal ignores is the reverse splits that take place in SVXY. Getting stuck with less liquid non-standard options can be a pain. One would have to be rolling into new options occasionally, with the attendant cost of doing so.
    10 Apr 2015, 09:00 AM Reply Like
  • ianxponent
    , contributor
    Comments (749) | Send Message
     
    What reverse splits? I don't think SVXY has ever had one. The last split last year was 2 for 1.
    10 Apr 2015, 10:58 AM Reply Like
  • UsuallyReasonable
    , contributor
    Comments (3) | Send Message
     
    Ha - sorry, totally confused myself. I was thinking of UVXY, having just read the article by MI about that.
    10 Apr 2015, 05:33 PM Reply Like
  • UsuallyReasonable
    , contributor
    Comments (3) | Send Message
     
    Please make sure I'm doing this right. On April 10 of last year SVXY closed at $59.76, so I plug $59.76 into my trusty B/S calculator along with a 60 exercise and 53% volatility. I get prices of $12.87 for the call and $11.92 for the put. My cost before commission to put this on is $24.79. (I used 2% for the interest rate. Lowering that to 0.5%, then 0.1%, made little difference)

     

    SVXY closed today at $78.34, so at that point I would hold a call worth $18.34 and a put worth $0, and pre-commission I am down roughly 25%. Am I implementing the strategy properly (given that there are no one year out options expiring on April 10, of course)?
    10 Apr 2015, 07:51 PM Reply Like
  • bikeeagle1
    , contributor
    Comments (31) | Send Message
     
    Like many of you, I am still intrigued by this idea. Has anyone backtested the idea of buying 50% shares and 50% straddle? (Proposed by jfairfax above)
    24 Jun 2015, 05:46 PM Reply Like
  • Rand String
    , contributor
    Comments (2) | Send Message
     
    Hi, I want to know the following

     

    Does "at the money" here mean that you buy options (call/put) that are both near the current market price for SVXY?

     

    Also, how do I decide which expiration dates to look for?
    14 Jul, 10:43 AM Reply Like
  • Learner16
    , contributor
    Comments (314) | Send Message
     
    To Rand. For the first question, yes. For the second, I wish I knew.
    14 Jul, 03:42 PM Reply Like
  • Rand String
    , contributor
    Comments (2) | Send Message
     
    So, should I assume that this is a long-dated straddle that expires approximately 1 year to the day of purchase? Say, if I open a position today, do I just buy SVXY Call/Put $58 2017/7/21 if available (which they are not yet)?
    15 Jul, 10:33 AM Reply Like
  • Learner16
    , contributor
    Comments (314) | Send Message
     
    That is what I understood from the article. From Jan to Jan they are usually available. You also need to take into account the IV when buying it.
    15 Jul, 06:22 PM Reply Like
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