VIX FUTURES: Abusing Volatility 2/2 (+67%)
It Is Time To Close The Second Volatility Trade.
Executive Summary
The email header changed; you can find me top right, MacroDozing like there's no tomorrow.
Volatility contraction and theta burn at their best.
UVXY is back at its mean, who would have thought?
No complaints about a 67% return on risk capital at that point.
1. Recap Situation
Volatility, or playing with volatility contraction and theta burn on volatility products itself, is fascinating and one of my favorite games in this market environment. It seems a little too easy, but all trades are risk-defined, so there is no catch. Of course, a significant market crash would be a semi-catch, but the maximum loss per trade can only be 100% of the risk employed. And intelligent trade management and advanced contract rolling techniques could mitigate a 100% loss even during a black swan/ liquidity event.
The general theme with UVXY - loyal and old-established BrainDozer subscribers1 should know by now - volatility wants to revert to the mean, and we are structuring trades around that. Check out the original thesis below if you want to refresh your memory or other senses.
2. Why Now?
Since trade entry more than a month ago, UVXY traveled from 18 down to 13 and back to our target 15. The contract has 22 days to go, perfect timing to get out, and not worry about last-minute surprises or ever-increasing gamma risk.2
3. Trade Execution
Trade Entry - 11 May 2022
1) Short Call 15, Jul 15: 6.90 Credit.
2) Short Put 15, Jul 15: 2.75 Credit.
3) Long Call 25, Jul 15: 4.40 Debit.
4) Long Put 5, Jul 15: 0.03 Debit.
Total: 5.80 Credit.
Trade Exit - 23 Jun 2022
1) Long Call 15, Jul 15: 1.64 Debit.
2) Long Put 15, Jul 15: 1.88 Debit.
3) Short Call 25, Jul 15: 0.29 Credit.
4) Short Put 5, Jul 15: 0.00 Credit.
Total: 3.00 Debit.
The absolute return of that trade is
5.80 - 3.00 = 2.80
The capital used on that trade is 4.20, resulting in a return on capital of
2.80 / 4.20 = 66.7%
If you subscribed about two months ago, you are considered loyal and old-established.
Last-minute surprises and gamma risks are significant risks in option trading, mitigated by early trade management and early exit.