Follow the Bouncing…Arrow

Yesterday, January 4th, in order to start out the new year with some degree of nail-biting (figuratively) drama, I hatched a little plan involving some short shares of UVXY.  The first thing I did was to buy to close 400 shares, reducing the 1,800 I had opened the previous day to 1,400 in quantity.  My plan was to re-short those 400 shares later in the day or on some upcoming day, along with 200 more which I envisioned as a day trade.

Then, thinking about the 1,400 short shares I still held, plus the 600 more I planned to acquire soon enough, I looked at premium for puts on the 6.50 strike of the same security.  As you can see from the graphic below, UVXY was trading in the $7 neighborhood when I sold 20 puts for the $6.50 strike and the January 13th expiration.

Of course, I was putting the cart partially before the horse, since I hadn’t yet made another short sale of shares, so only 14 of these contracts were considered “covered puts” and 6 were plain old stark naked.

See chart below for the timeline of my trading so far this year.

Here is expanded detail of the put trade.  This chart tracks the exact contract.  Last week, trading price was just a few pennies.  This week, prices exceeded twenty cents.  My price received was eighteen cents.

Several courses of action are available to me at this point, particularly regarding the short puts.  I could keep them and hope they expire worthless on January 13th.  This would require UVXY to close above $6.50 on that day.  I could trade my way out of the puts, by buying them to close and making a profit, breaking even, or taking a loss.  I could leave six of the contracts naked, or I could short more UVXY shares to make some or all of the contracts covered.  Of course, I could buy back any number of my existing short shares to make any number (including all ) of my contracts uncovered.

Will UVXY change in price today or in an upcoming day such that I’ll feel motivated to close my short puts?  Will it appear safe to leave those puts open through expiration?  Since I received eighteen cents in premium, UVXY could close as low as $6.32 (that’s $0.18 lower than the strike of the contract) on expiration day and I’d be able to realize no loss upon covering the short shares just before expiration.

Will UVXY rise enough that I’ll decide to re-short the shares I recently closed, and will I want to short even more shares?  Or will it rise so much that I’ll want to keep watching it for a higher entry point?  Will it continue to sink, yet I’ll decide to short more UVXY shares anyway?  Or will I close all of them?  These are all questions that will be answered in my next blog entry, as the near future unfolds.  If you’ve read this far, you must be following along, and if you’ve been doing that, I’m glad!