DGI Adventure 12-21-16 – Shorting the Worst Stock Ever – UVXY Put Update

Back at the end of September I started an experiment to short what could only be described as one of the absolute worst stocks ever created: The ProShares Ultra VIX Short-Term Futures ETF (UVXY).

In case you missed it, I covered the basics of why I wanted to short this dog in this post published on 9/30/16.

TL;DR version: this ETF takes bags of money, throws them in a dumpster and then lights the whole thing on fire. It basically says as much in the prospectus.

So far I have seen this hypothesis through on three complete trades:

I totally screwed up with the first contract I bought.

The second time around, worked out pretty well.

Today’s post documents some continued success. I track all of my UVXY trades on my Dividend Income Tracker back at the mother ship. (Go to the tab labeled “UVXY”).

Anyway, here are the details of my most recent trade:

On Thursday, December 1st I bought three (3) contracts of the JAN20 2018 PUT $10strike. I paid $5.55 per share + $1.24 trade commission for a total investment of $1,666.24.

On Wednesday December 14th, I sold those contracts for $5.95 per share and paid $1.31 in commissions netting proceeds of $1,783.69.

That works out to a tidy profit of $117.45, which is a 7.05% absolute return in 13 days. That works out to 197.91% annualized.

I’m getting a better feel for how to make this trade work. The spreads can be really wide and the contracts become illiquid once the trade moves decidedly into the money.

It seems to work well to buy the at the money or slightly out of the money contracts on a volatile day (i.e. the UVXY is actually up).

It also doesn’t appear to help to hold the contracts very long after the price falls  deep into the money. Once it gets down too far, it’s almost like the extrinsic value just gets replaced by the intrinsic (rather than added to it.)

All signs indicate that this looks like it’s working. It still boggles my mind that this trade isn’t more crowded.

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