Friday, October 13, 2017

A fuller Short VIX portfolio

There is a whole risk spectrum to short VIX which a lot of these twitter idiots either ignore or absolutely refuse to understand which I've touched on before.  Short VIX isn't 100% of buying power in selling naked VIX calls, although I suppose that is the purest form to do.  (I'm not that crazy even though I see other twitter guys going all in portfolio margin)  The point is short VIX is exposure to the mechanics of VX futures converging to spot, and you can layer that exposure into your portfolio at 2 levels: product/strategy choice and % allocation.
  At the strategy choice level, I have dabbled across a few things including long XIV, short SVXY puts, SVXY verticals, short VXX call verticals, and now I'm touching on buying UVXY put spreads to get that extra decay. 
The main reason behind this switch is tweaking the full portfolio from:

-Short VIX exposure (~40-50%) plus cash to buy dips if the short VIX positions are tested,
-Higher yield short VIX exposure (~15%) plus uncorrelated positive premium positions (~50%) plus cash to buy dips.  Higher yield being closer to the money, going from SVXY to UVXY shorts.  We are trying to get a similar monthly premium with a lower max drawdown for the edge cases, making the cash position more effective.  With the way VIX products decay, you are either up or REALLY down, so unlike many products, it might make more sense to be closer to the money so the premium from most of the time better compensate the huge spikes down.

Here is a correlation sample of the main products I'm working with, going back ~8 years (to GDXJ inception):
(I'm using SPY as the baseline as my short VIX strategy is basically long SPY like Boglehead idiots just with more leverage/ multiple decay components)

Even if you are bearish on bonds given the macro Yellen show (which I semi agree with), this is still a short VIX portfolio 1st, so I am fine with having these uncorrelated positions to XIV because that is my main macro assumption.

I've been doing ATM TLT covered calls and very close ATM GDXJ diagonal/poor mans covered calls to create some kind of hybrid mega dividend.  I touched on the psychology of the ATM covered call in a previous article in that I'm trying to get the best downside breakeven and in this setup I'm trying to have the premium be the primary driver so that annual gain is the most easily modeled .

Is there a point here? Basically short VIX can be the core of a full portfolio which is complemented by a big cash position and uncorrelated underlyings to buffer the swings a bit. (Remember we are trying to create that poker cash game slow grind up)
Given the low spot VIX with my current short VIX allocation between 10-15%, if we have the overnight termination event wet dream that the bears can't stop about on twitter that will WIPE OUT ALL VIX SHORTERS, then hey, I'm down 15% and will probably have some insane pot odds to get back into new short vol positions.  Furthermore if we do have the nuclear winter, the uncorrelated positions should hold some value and a 'benchmark' portfolio of 100% SPY might be even worse.

I don't know why I even bother because we'll never hear a reasonable response from these people so I guess this is more for the one person out there that wants to join the discussion on tweaking short VIX portfolios to reduce the insane swings, or maybe someone that is trying to add a little short vol to their current portfolio.


  1. You have written an enjoyable series of articles shortvixguy. I've also become enamored of writing ATM or slightly OTM covered calls on TLT and SVXY...premium income adds up and very quickly provides a buffer for the dreaded Big Crash That Will Happen Soon!

    Another short VIX strategy I've been exploring in a small way is selling deeper OTM UVXY monthly call spreads (requiring a 2-3 point jump in M1 & M2 to get to the strike). My theory is that normal decay rapidly improves the buffer to strike, and if there is a spike (as occurred last week) that exceeds the strike price I can sell my TLT (hopefully at a profit due to its negative SPY correlation) and cover the UVXY exposure at the short call strike, i.e. transform the call spread into a covered call position. The theoretical icing on the cake in such a scenario is then to sell the long call in the spread at a likely profit, providing a further buffer against losses that might arise from trying to buy UVXY at the short call strike price. Still trying to quantify potential returns vs risks to my portfolio, but we will see

  2. Its great to see someone is thinking the same!
    I'm not even fully locked in on SVXY short put spreads vs UVXY call spreads vs long UVXY put spreads, or possibly SVXY covered calls. The main thing we're getting right is the short vix exposure.
    would you be looking to roll the call spread for a credit if tested? ive done that with short svxy put spreads. You can always come to my twitter, I can respond quicker on there-
    thanks for your thoughts!