Day: January 30, 2018

Volatility Persistent through the Trading Day $UVXY $VXX $XIV Jan 30 2018

As I said in an earlier post, many new traders woke up to an unusual volatility spike. Those of us doing this for more than a year remember when this happened on a regular basis. 

 

So far today: 

  • $SPY down to 281.22 but bounced up to around 282 
  • $VXX spiked up to over 31.80 but has settled down to about 30.75 at the moment or up about 3.35% on the day 
  • $XIV is the inverse of the $VXX, and $UVXY is double the $VXX and have moved accordingly.  
  • I bought a teensy amount of $XIV at 121, haven’t added, haven’t sold. 
  • I sold some covered calls against both the $UVXY and the $VXX.  These are spread out over the next three expirations Feb 2, Feb 9 and Feb 16. 

But here’s what I did this afternoon: 

I bought two calendar put spreads, one in the UVXY and the other in the VXX. 

For each 100 shares of equity in these names I bought the same number of puts with a strike price of 27 for the VXX and a strike price of 12 in the UVXY. 

I sold and equal number of puts with the same strike prices in the two names (27 and 12) that expire on Feb 16. 

I paid $120 for each UVXY put spread and $133 for each VXX put spread. 

Since all the long, covered calls expire by Feb 16 I figure I can’t lose. These names can’t be both above and below the two strike prices on Feb 16, right? 

Buying puts on volatility names has frequently been a winner for me in the past. When volatility is high is usually when you can get quite a good price for the near dated short option and then as volatility falls these short options peter out pretty quickly. 

Time to Panic? Time to Buy? Volatility and my morning trade in $AMZN, $VXX and $UVXY Jan 30 2018

If you just started trading just after the 2016 election you woke up this morning to something you have never seen. The market is down, and volatility is up.

Those ‘old timers’ that started trading, oh let’s say the summer of 2016, have some experience with this but its quite a shock to you, right? The market was set to drop about ½ to 1% (I always will use the S&P500 here for ‘the market’) and in fact did so. As I write this, the market is down about 0.86% 

As an option trader, when the market opens you can see the market value of your portfolio plummet out of proportion to the move. 

This is because volatility explodes on a day like today. One of the hedges in my portfolio are holdings in $VXX and $UVXY. Between the two they comprise about 12% of the market value of the portfolio. This morning $UVXY is up 11% and $VXX is up 5.5%. 

But my portfolio looked like it was blowing up, being down about 15% at the open when the market is down only 1%. 

This all has to do with how Fidelity prices my portfolio. It ALWAYS prices the options at the worst possible executions for every position. It always assumes that I will sell only at the low, bid price and buy only at the high, ask price. Volatility is a measure of that bid-ask spread so as it widens, the portfolio suffers. 

That also explains why every day at the close the market value of my option rich portfolio will drop 2 – 6% just seconds before the close. That’s because the bid-ask spreads widen right at the close. This is way more pronounced with puts than with calls.  

We have been in a historically low volatility environment and if you are new to trading you haven’t yet seen a rise in volatility quite like this. Trust me, it used to be normal. 

So today, I’ll be writing covered calls in the $UVXY and $VXX and maybe even some credit call spreads. 

I’m also going to buy a VERY small amount of $XIV and, in fact, I already have at 121. That’s the inverse of the $VXX. 

$AMZN 

This mega-cap stock reports on Thursday and I am getting a little longer today. When $AMZN was under 1400 I bought the April 20 call butterfly spread, 1420/1440/1460 for about $90. I may also buy a calendar call spread buying another April 1460 call and selling a Mar 1460 call for $1,600 debit. I’ll fish for that one a little bit and see if I can get it cheaper . . . . I’ll let you know. 

Good Luck today!