The VXX and other volatility ETFs continue to distort the market

A short note today . . . .

I live in Austin, Texas and I am a product of the University of Texas. I hold season tickets to the Longhorns Men’s Basketball games and tonight, they play K-State. Gotta go root for my team.  

Today as I told my buddy, normally the SVXY trades twice what the VXX does. But, today, at one point mid-morning the VXX was down 3% and the UVXY was up about 5%. Makes ABSOLUTELY no f**king sense. 

Somehow this is all being worked out but I have to believe it is moving the SPY with it, classic tail wagging dog kind of stuff.  

If you haven’t seen it yet, you should read Howard Lindzon’s post. Read yesterday’s post and then read today’s here. 

I’m still a buyer of this dip in many names. Looks like I may have made some good moves today with TSLA. We will see tomorrow. 

The Blowup of the $XIV is massively distorting the options market.

This is the most interesting day I have seen in the markets as an active options trader. 

First, the $XIV blew up. I just typed ‘first’ but really it’s the whole story today. 

There’s a great blog post by Howard Lindzon (read it here) that does a far better job of describing it than I ever could. However, I have some experience with XIV, UVXY and VXX if you have been reading my blog over the last week.  

Basically, the XIV was an inverse volatility ETP (exchange traded product). It’s issuer Credit Suisse froze it and plans to liquidate. How it liquidates is to buy volatility to cover it. This explains why the counterpart, the VXX, is up today but all over the place. Right now, its in the low 50s, after hours last night it was over 62. Yesterday morning it was trading about 32. 

As I understand it, listening to the talking heads on CNBC, it is also liquidating by selling SPY which may explain why it is hard for the SPY to get traction when stocks are higher. 

And here’s what is really fascinating, my speculative portfolio comprised of about 27 names and their options looks horrible but when you look out, the call options that expire this week or next, are elevated even when far out of the money. Here’s some examples: 

  • NVDA – trading about 217 and the 235 call that expires this weekend last traded at 3.62 
  • TSLA – trading about 330 and the 355 call that expires this Friday trades about 2.8 
  • SPY – I was put some shares this morning and instead of selling them I decided to sell some covered calls against them. When the SPY was trading about 264 I sold the Feb14 273 calls for 3.30 

Since both the accounts that I trade actively are comprised mostly of options, my value looks HORRIBLE but I’m not panicking and looking to make the most of this spike in volatility. 

Fortunately I was long both $UVXY and $VXX but I was short covered calls on them so my profits are capped. But I’m gonna let them ride and see what happens prior to expiration this Friday and next. 

What do I do next week with $AAPL $VXX $UVXY $IBB $GOOGL and $SPY?

This week on Options Action, the traders and the ChartMaster talked about a few new names and then reviewed a few old trades. 

AAPL – Dan Nathan is short term bearish on AAPL but really is bullish in the longer term recommending a selling a naked put, specifically the March 16 150 put for about $2 or $200 per contract. 

I like this, but I can’t trade naked short puts in my retirement account with limited margin so I’ll have to do it as a spread. I could sell the 150 put with the Mar 16 expiration date and buy the March 23 140 put option for $70 to create a credit spread of $130.  

I know this is being a bit cute but buying the 140 put that expires one week later gives me a bit more flexibility in managing the trade. No matter if I was to buy the !40 put expiring on Mar 16 or the next week I will be required to put up $1000 in margin requirements for each contract spread.  (the difference between 150 and 140). 

$USO – these guys are bearish and bullish on the dollar. I agree, but I had sold my USO position last year as Fidelity informed me they were going to charge $300 per year to generate K1’s on MLPs starting in 2018 and USO was the only thing that I had that qualified as an MLP. 

However, I do own SCO (short crude oil) which comprises a whopping 0.3% of my speculative portfolio and is down about 37% from purchase. I had bought it as a hedge and will sell it if there is a big drop in the USO. 

$SPY – Mike Khouw recommended a trade in the SPY buying a March 16 275/265 put spread for $265 per contract spread.  

Again, I like this but I think I would use a calendar put spread buying the March 16 275 put for $511 and selling the Feb 16 175 put for about $300. This will cost you about $211. With my trade if on Feb 16 the SPY is above 272 you can roll the short call a total 6 times between then and Mar16. Great trade providing this downturn is short. 

$GOOGL – Mike had a GOOGL call spread he put on last week buying the Feb16 1185/1270 call spread for $2650. 

I put on something different, and I’m glad I did. I bought a butterfly that expires in March, a month later. I bought the 1210/1270/1300 call butterfly for $1,428. Mine will break even at 1225 on March 16. Mike’s will break even at 1211 on Feb 16. I’m glad to have that extra month. I could sell mine now for about $400 but will probably give it some time and maybe sell a credit spread before that date. 

$IBB– Dan had bought a March 120-135 call spread last week for about $225. I am already long quite a few calendar call spreads and a fewer number of calendar puts, so I didn’t add anything. I may add an iron condor tomorrow to extract some extra value from the calendar spreads I have. 

Tomorrow should be interesting! 

Do you have any questions about options or specific names? Send me an email or leave a comment. 

Value Investing and My Trade in $GOOGL and $OSTK

First to two trades I’m putting on today. One has already filled, $GOOGL, and one I am waiting to see if it will fill today, $OSTK.

I am long both these names via call spreads and also slightly hedged with one put spread in each of these names. All my calls are also hedged in the sense that I always sell a call when I buy a call, that is I RARELY outright buy either calls or puts. I am 95% spreads.

The $GOOGL trade:

The last post I wrote that I was considering a butterfly in $GOOGL. I, in fact, did that today buying one March 16 1210 call, selling two March 16 1270 calls and buying one Mar 16 1300 call. This cost me $1450. At this expiration, the breakeven would be 1224.5 and max profit would be at 1270.

However, I’m sure that should the stock really advance I would buy a call calendar buying the Mar 16 1300 and selling an earlier dated 1300 call.

The $OSTK trade:

$OSTK reports today. Implied volatility is VERY high for this name (mostly because of cryptocurrencies). So I wanted to take advantage of that and sell an iron condor. I’m going out to March 2cd as this is where the numbers seem to be the best. The strikes are 40/50 puts and 100/110 calls. I’m trying to get $270 for this which is pretty low for the $1000 you have to risk for it. But the I’ll take it if I can get it. Again, after earnings today either one or both of these spreads may be closer to the price and I can trade around it.

FastMoney Halftime today:

Mario Gabelli was their hedge fund guest today and he was very proud of the fact that he doesn’t trade derivatives. He just researches and then buys and sells the equities. He said he has something like 650 names in the portfolio.

I think that’s great and for the bulk of my assets I have something similar. That is I turn these funds over to a manager and they trade either funds or ETFs based on their research. As I stated before they returned about 18% last year, and yes that is less than the S&P which I believe was 27%.

But in my retirement account I trade in, and the account that these trades are in I got about 78% return last year. You just can’t get that kind of return without taking substantial risk and that’s why I don’t bet the farm on this account. And I get that kind of return by trading options, which of course are derivatives.

And even though it is a smaller part of my overall account, its still fun for me and the smaller position, I think, frees me up to be a better trader.

Bottom line, I think its good to have both value investing in your portfolio and a wee bit of speculation, too. Let’s face it, if you’re reading this, you like to trade. Me too. Just size you positions in each so it doesn’t consume you, or keep you awake at night!

Good Luck with your trading!


AlohaTrades is Back and wants to help you with trading!

I started this blog in late 2012 trying to use it to help sort my thoughts about my personal investing and trading. At that time I managed the great bulk of both my taxable and retirement accounts. In 2013 I had what I considered to be a phenomenal year, up about 45%. 

 I thought I was pretty smart, that maybe I had finally figured out how to make money. I was right and I was wrong. In the first quarter of 2014, using the same techniques, I lost about 30% putting my account back to where it was at the start of 2013. I had made a round trip. But I had really lost money as I had to pay taxes on good portion of my 2013 gains so I ended up 2014 with losses that I couldn’t deduct (other than $3K) and had to carry them forward. 

 I wasn’t sleeping well at night and many times during the day I would ruminate on my 30% loss. Losing felt far worse than what I would have predicted. I couldn’t remember how good making money felt. 

 So I made a change. I took most of my assets and placed them with Fidelity’s managed portfolio and carved out two accounts to trade options, one retirement account, and one taxable account. I also have a taxable account where I just buy and hold. No options trading. 

 These two accounts now comprise about 20% of the value of my retirement accounts and about 15% of the value of my taxable accounts. 

 Last year I made about 75% in the retirement account and about 35% in the taxable account. The managed accounts returned a bit under 19%. I pull cash out of the two active trader accounts twice a year and put them into managed accounts so that the trading accounts keep about the same dollar value going forward. 

 This has been a really good technique for me and the fact that they comprise a ever shrinking part of my assets frees me up to take risk. Simply put it has made trading fun for me again. I look forward to it every day and I sleep well every night. I haven’t lost any sleep on my positions for over 2 years, not one night. Gains feel good and losses sting, but its pretty equal now, not asymmetric. 

 So I’m here again, mostly for myself. I want to write some of this down to help me focus, but I also want to help others, particularly people like me, retired but looking for something stimulating and social. 

 So I invite you to join me. I’m going to build this site slowly and hope to eventually add an email newsletter. I’ll tell you waht I’m doing. I’ll tell you what has worked and what hasn’t. I want to critique some of the free content out there, particularly that promulgated by CNBC. I watch CNBC way more than I should but I have a much better relationship with them than I used to. I plan on talking about soon, maybe the next post. 

 Until then, good luck with your trading and investing! Aloha!