Closing a Volatility Short + Selling an Inverse Volatility Strangle

Let’s check back on the progress of a trade last mentioned two posts ago.  This could be described as one of my favorite games ever, formally called “shorting the ultra-long volatility.”  I’ve dabbled in both TVIX and UVXY recently, and the October 6th post illustrated some meat carved off the bone from the eleven-ish level on TVIX down to $9.48, when I just could not resist taking a bite.  To the tune of $651.

Never one to be happy with a clean plate, I loaded the plate again, as alluded to in that post as such: “jumped back in less than one hour later” … “and sold some UVXY short at $43.79.”  I also mentioned that I might have to sit through some adversity with the position, but I didn’t really believe it was likely; I was trying to minimize cockiness and also preemptively save face, in the event I might be wrong.  Six trading days later, I bought the short shares back for $38.59, and it was not necessarily to “call bottom” on a move, but rather, to take a short breather and convert the chips back to TVIX.  Why would I do this?

Well, originally, I got the clean hundred of UVXY short shares with the intent of selling one put against it.  But, due to pathological cheapness, I could not bring myself to do it.  Said another way, I didn’t think the premium I’d be able to collect at the time would be worth offsetting the potential gains I’d make with UVXY short shares.  Take a look at the activity during the days I held this to see how difficult it was to pick a plausible UVXY bottom:

 

As you can see, I tried all day on Thursday the 8th, but basically sat back in awe of the ever-dropping share price, each minute happier than the minute before that I had not tried to be a wise guy and set a floor on this rolling boulder.  On the 14th, realizing that if I had not sold a put yet, I would probably never do it, I bought the UVXY shares back and then used most of the proceeds to add to an existing TVIX short position I had started to build up on October 7th, 8th, and 12th right after writing my “Book It While It’s Hot” blog entry (because apparently I like cooking more than I like booking, so I secretly started a pot boiling as soon as all of you had left the room.)

This brings us all the way to today, where I closed out the varied and sundry lots of TVIX accumulated recently and took a nice profit, but felt immediately afterward like a person who just ate the last piece of cake.  How does such a person feel?  Wondering where their next piece of cake is going to come from – that’s how!  Here’s the cake, sliced up:

Now I’m in need of something to do if I’m going to stay out of trouble.  I looked over the SVXY options chains this morning when SVXY was trading at around $63.00.  They looked like this:

Here’s what I did:  I sold just one call for SVXY expiring on November 20th, 2015 at the 66 strike for $3.17, and I sold one SVXY put for the same expiration at the 60 strike for $3.60.  I have more than 100 shares of SVXY, which makes this what I call a “strangle sandwich” (a short strangle with shares in the middle) but what the brokerage labels a covered call and a naked put.  Here is what a section of my portfolio looked like soon after initiating these positions:

This post is already long, so I’ll save the exact profit/loss calculations for the various outcomes and go into them next time.  But the outcomes will run something like this, assuming that I won’t buy back the contracts (and I don’t plan to):

Keeping the premium received from both legs or
Having 100 shares of SVXY put to me and keeping the premium from both legs or
Having 100 shares of SVXY called away from me and keeping the premium from both legs.  We will see next time which, if any of these outcomes, is looking particularly likely over the other ones, and calculate what might happen regarding additional share purchases or sales connected to these contracts.  I will also go into my motivation for assembling this simple structure of bookend-like contracts.