DGI Adventure 10-21-16 – What an Idiot! – UVXY Put Update

At the end of last month, I finally worked up the nerve to try out a trade that I’ve been contemplating for a long time now. It involves shorting what is possibly the worst ETF in history: The ProShares Trust Ultra VIX Short Term Futures ETF (UVXY).

If you didn’t read that post, you can link to it here.

No really, you should get caught up, or this post won’t really make any sense. Go ahead, we’ll wait.

Okay, so now that you’re caught up, we all know that I bought a UVXY Jan 19 ‘18 $16 put for $9.85/share. Good. Great. Wonderful.

Well a few days later (10/4/16) I bought a slightly different but also quite similar contract. This was a UVXY Jan 19 ‘18 $15 put, and I paid $9.21/share for it.

I bought this second put contract for two reasons:

1) There was a bit of a VIX spike on 10/4/16, so it was theoretically a better day to be buying puts  than selling.

2) The theory was that I would run something of an experiment. See, I’m still a little skeptical that the decay rate of the ETF is faster than the time decay of the put option. If it is, then you should just be able to hold on to the put for a while (or even till expiration) and make a good return over enough time.

But I suspect there’s a little more timing involved, so I thought I’d try it both ways. I decided to get another put to trade in and out of, and hold on to the original put for a while as the share price plunged deep into the money.

The $15 strike contract was supposed to be the “trading” contract, and the $16 strike was supposed to be the “holding” contract. I figured they’d be close enough together to behave roughly the same over time.

This site is all about trading transparency, so you’re right to wonder why I didn’t write about buying the $15 strike contract. I guess I was waiting till I sold it so I could discuss the complete trade? IDK…I just didn’t write about it. Sorry. I’m writing about it now, okay?

Well after about another week, neither of them were really worth much more or less than I had paid for them. Although it’s kind of hard to tell what the contracts are actually worth because these puts trade with really wide spreads. The midpoints of the spreads weren’t really going up, but the extremes changed around a lot.

Then there was another spike in the ^VIX on Thursday 10/13, and this one was even bigger than the 10/4 spike:

^VIX 2 Week Chart – Courtesy Google Finance

This moved the needle on my puts, albeit in the wrong direction, so I decided to average down on the $15 strike, and bought yet another UVXY Jan 19 ‘18 $15 put for $8.81/share, My cost basis on the two $15 strike contracts was now down to $9.01/share.

Don’t ask me why I didn’t write about this third contract either. Same reason I left out the second one I guess.

Okay, now fast forward to Tuesday 10/18 on that chart above and you can see that the VIX was chilling back out, and UVXY was gapping down as you’d expect:

UVXY 5 Day Chart – Courtesy Google Finance

I said to myself, “self…this might be a good day sell that short term position!” So I logged into my account and started looking to trade.

This is where the “idiot” part of the post’s title comes in. I had a brain fart and got mixed up on which contract I was planning to trade in and out of and which one I was planning to hold. When I was looking to trade I was looking at the $16 strike contract for some stupid reason. That wasn’t really the plan.

Adding to the confusion, the spread on the $16 strikes was super wide and the midpoint was down around $8.75 share, which didn’t make a lot of sense, since it had been in the high $9’s for the past two and a half weeks.

All this confusion conspired to turn me into a total idiot, and I got it in my mind that my cost basis on the $16 strikes was $9/share, so I put in a flyer of a limit order to sell at $9.50, thinking this would net a $50 profit if it sold, but it probably wouldn’t since it was so far above the midpoint.

It sold instantly. So fast that I knew something was wrong. This was when I realized that my cost basis for the $16 strike contract was $9.85/share, and I had just lost $35.

I usually don’t get filled that quickly when I’m so far away from the midpoint of a spread, but obviously it was a pretty good price so some trading robot nabbed it. Something really weird was going on with that spread…maybe on purpose?

Goddamn robots tricked me:

Anyway, with commissions and everything I ended up losing $35.71, which was an absolute return of -3.62% in 19 days, or -69.6% annualized.

I still have my $15 strikes, which just went into the money yesterday, and the midpoint appears to be creeping well above my actual $9 cost basis.

Interestingly, it’s not like the $16 strike contracts have shot up well above the $10 range, even though they’re over $1 into the money.

They still have a super wide spread, and the midpoint remains around the $9.85 range, although maybe you can always count on selling them high above the midpoint?

IDK though…I tried to sell the $15 strikes way above the midpoint, thinking that was maybe just how things worked with these contracts but I couldn’t get filled. My concerns about the differential decay rates live on. Time will tell, and I promise I’ll try to remember to write about these trades as they unfold.

Of course, even if I haven’t written about it yet, I always immediately update my dividend income tracker back at the mother ship. I’ve added a tab called “UVXY” where I plan to keep a record of all these trades.

The UVXY shorting experiment is not off to a great start, but I have to put it in perspective. I’ve paid a lot more than $35 for some of my investing mistakes. This one was relatively cheap.

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