VIX FUTURES: Abusing Volatility 1/2 (+49%)
Time To Close Our First Volatility Trade.
Executive Summary
BrainDoζer Theme: S&P 500 implied volatility (VIX) always reverts to the mean.
UVXY, the VIX product in question, has indeed regressed to the mean.
Buying back the risk-defined straddle with 49% return on capital works for MacroDoζzer.
1. Recap Situation
So remember, we wanted to make a difference in these volatile markets, and why not with a volatility product. Fighting volatility with volatility, not sure where to put this, philosophy, romanticism, you decide.
In the investment thesis, in a nutshell, S&P 500 implied volatility (VIX) always reverts to the mean. We introduced UVXY as the most capital efficient and liquid underlying to trade VIX movements. Selling a risk-defined straddle would generate a decent income targeting the mean.
2. Why Now?
As predicted, UVXY has reverted to the mean, and now, as the trade made some quick 49% return on risk capital, it would be foolish not to take it off. There are only 22 days left on the contract, and in case of a sudden volatility spike or drop, there would not be much time to wait for another mean reversion.
Our break-evens are the green dotted lines, profit zone between 9 and 21. Maximum return at 15 - Swiss watch, you got competition!
3. Trade Execution
Trade Entry - May 2, 2022
1) Short Call 15 Jun 17: 5.30 Credit.
2) Short Put 15 Jun 17: 2.40 Credit.
3) Long Call 25 Jun 17: 2.46 Debit.1
4) Long Put 5 Jun 17: 0.01 Debit.
Total: 5.90 Credit.2
Trade Exit - May 26, 2022
1) Long Call 15 Jun 17: 1.70 Debit.
2) Long Put 15 Jun 17: 1.70 Debit.
3) Short Call 25 Jun 17: 0.33 Credit.
4) Short Put 5 Jun 17: 0.00 Credit.
Total: 3.00 Debit.3
The absolute return of that trade is
5.90 - 3.00 = 2.90
The capital used on that trade is 5.90, resulting in a return on capital of
2.90 / 5.90 = 49.2%
We modified the trade on May 3. We moved Call 30, Jun 17, five strikes lower to Call 25, Jun 17. It resulted in the positive effect of maximum profit (/return) = maximum loss (/risk). In addition, capital employed decreased by 35%, resulting in improved capital efficiency.
Rounded up to meet mid-point of bid / ask spread.
Rounded up to meet mid-point of bid / ask spread.