Trades while waiting for VIX and a poker metaphor-

A little update while waiting for a vol pop as I closed out of the long duration UVXY shorts from this last year...
First a little context and my clickbait "THE ONE CHART THAT SCARES ME"

 This is 1yr rolling % change for UVXY going back to ~1yr after inception (so we can have 1yr rolling data points)

What scares me is that little tip there in 2018, meaning for the 1st time in this product, the 1 year rolling decay couldn't offset a vol spike (which is pretty significant given the average decay is ~80%). The main factor here is the deleverage of the ETF from 2x to 1.5x, while the same time period had the Feb 5 2018 vixtermination.  Its hard to split up how much of each factor contributed to this chart, and if they are multiplicative. (leveraged on the VIX spike, and deleveraged on the way down) 
A future vol spike will have the benefit of equal leverage on the way up and down, although that will cause the product to more closely resemble VXX 1 year rolling.

Because of the uncertainty around this, as well as the possibility of mid spike leverage changes by the funds, I still don't think we can have a constant 1yr+ duration rolling short UVXY position, so I want to wait for some amount of spike before re adding the position.

With that context, what am I doing now?

Given the mid/low VIX range at ~12/13 and SPX IVR at 0-10 this last month, I have been very active with short term calendars (~7dte/21dte) to keep a low delta/positive vega and long theta position on while waiting for a big vol move.  I've specifically been trying to take them off at 5-10% profit or at a loss when theta goes negative.

  And here is my poker metaphor for these trades-

2 types of "I've got you"...

1. I have the nuts, just salivating to see what you will bet, or if I can get a check raise.  The sense of skill is from how much can I win in this hand- trapping, etc

2. I am defending... I know from the opponents betting pattern/ranges that they probably have the nuts/ top of their range and they are salivating to see how much they can get from me.  The real skill/strategy is from seeing if I can get a free card in this hand, do everything to not get trapped and lose the minimum. When they finally bet and you insta-fold, you both know that even though you 'lost' the hand, you got them.  As the defender you more correctly assessed both hands and took their big spot that would normally be a big % of their winning session.

With these short term, at the money SPX calendars I'm specifically trying to get small wins and losses, just flip the weighted coin as much as I can.  If you are primarily used to short options/ spreads and rolling the other side/ rolling for duration, it might be harder to mentally click over to at the money delta/theta adjustments to be most capital efficient.  Ultimately I'm trying to be conscious of that 2nd bulletpoint of poker which gets lost in the 'win the maximum' $TSLA meltup we have been in.  

Post 2/5 thoughts and metaphors

With almost a month of normal VIX action, I think I'm just about past all the 2/5 chest pain and mega blood pressure,  all the really bad SVXY spreads got assigned/exercised, now its just like 3rd person looking at an event historically, resuming full 'namaste' mode.

The main vindication is that from the UVXY/ VXX spreads with enough duration, those will probably be fine with some rolls, so the idea of shorting VIX even at the lows in the right product with enough duration is fine!  This really was an XIV issue, not a true short VIX issue, even if that sounds odd.  The whole thing felt like a forex stop hunt, which is why as short premium people we don't even have the inkling to feel the forex jumps.  The issue here is that it was like a stop hunt on an entire product.

One of the blogging issues in the aftermath is that there just isn't much to say now- there was a big hit and now we just gotta grind back up.  (Sorry if I've been a little quite but I'd rather not spam the same thing over and over).  I got some great prices on short VXX put spreads just after the spike to flatten deltas on the slow VIX grind back down, but even a week later that insane premium came in by a lot so going forward there will be way less decay on the "long" VIX side.  Either way I think going forward I'll be leaning toward the 'soft cap' short VIX iron condor with the VXX short put spreads as the slight yield boosting hedge as opposed to another asset class like bond or metals strangles.

On the emotional side of trading I just don't think I should be 'hedging'/ boosting yield with other asset classes because I get a tranquility from VIX, we understand it as an asset class and a human concept, and the same can't be said for bonds/commodities.    

Given the whole SVXY blowup (why couldn't I be all VXX/UVXY short call spreads), I've just been thinking of it as the car crash metaphor, the kind of hit we signed up for, and that makes us a better trader in the future and a more complete human being.
In high school, one of the earliest kids to get a driver's license and car was a bit reckless and did get in some accidents, but one thing he just said jokingly stuck with me-
I think someone was discussing that some parent wouldn't want him picking up their daughter or something in his car since he had an accident, but his retort was "no dude you definitely want a driver who has been in a bunch of big crashes, they are much safer"
(you have to picture it with a boisterous sarcasm. He had a huge trunk subwoofer in his 4runner in ~10th grade and was an all around character)

I've been thinking about this lately and in the scope of all kinds of risk, and it is a bit of a joke but I think some kinds of risk you really need to experience, or else no amount of info on paper will make it real.  Even if I had all my positions in UVXY and didn't take such a hit then in the future I still might  not have the clarity I got from this experience.


Takeaways:

• Short VIX works! XIV didn't

• Grinding it back up this year with soft cap iron condors on VXX/UVXY

• Just hedging with the short premium on the 'long VIX' side of the condor (I think I'm over metals/bonds), also can potentially use some of that premium on additional OTM long VXX calls to flatten out spikes slightly.  (This is mostly about the psychology of the strategy and short VIX, bond yield uncertainty is scarier to me than VIX spikes)

• Life is suffering, but this is what we sign up for, otherwise why even wake up if you are just going 100% SPY

 

Thin value pt 2- soft cap iron condor

Continuing from my last post on the "thin value bet" to add a little juice to short VIX positions, I thought I'd add a sample trade/ more fleshed out idea-

The soft cap iron condor:

My idea for this is basically a very skewed iron condor in certain conditions which aims to add a little premium or reduce max loss on a position at the chance of losing due to a huge vol collapse.
Taking the existing portfolio risk of 10-20% max draw down with your short vol positions, we add verticals on the other side at about the 20% monthly decay mark which is about the max where VXX goes per month- the "soft cap".  Those verticals aim to have a max loss equal to the max profit of the short vol verticals, meaning there is no risk of loss to the short vol side, but you theoretically could have a month ending up a scratch.  In real trading conditions that much vol decay would have you rolling up/down the other side, but that complicates the simplified model.


I was going to scribble this out in MSPaint but what is thinkorswim even for? Might as well make it look a little more accurate if we can. So here is the "soft cap iron condor" in VXX :

 This is using sample numbers from the 1/30/2018 close, with VXX at 30.60
Assuming a sample 10k portfolio, targeting 20% max draw down from the short vol positions (verticals) we would have 2k max risk to play with-
Short side:
35/38 call spread (~15% out of the money) for .44 cr, $256 risk =~ 8 spreads
= $2048 risk, $352 credit

Normally this is where we would stop, but depending on spot VIX being super low, low spot with not much /VX premium over spot, or if your positions are at max loss and you want to take some max loss off, we add the skewed opposite side:

Long side:
$352 risk available, from the $352 credit from the short side
20% otm =~24.5 put
24.5/23.5= .13cr, 87 risk =~4 spreads
$348 risk, $52credit

Why is this different from $SPY iron condors?
Unlike straight stocks that have earnings, buyouts, crazy FOMO, short squeeze/melt ups, VIX products have some conceptual constraints which I was pointing to earlier such as the decay behavior in the 9 handle:

Going back to SVXY/VXX inception, 9 handle VIX closes don't hit that 20% monthly decay historically.  Again this might not persist forever but its at least a start into quantifying directional risk differently for this different product.  

Conditions/issues:
-Obviously there is no free money anywhere so this is just a way to flatten risk and add more trade offs.
-I wouldn't do this right after a VIX spike because historically that is when you can hit those 20% monthly decay numbers (the quick VIX drop after a spike). I might add this on if after a VIX spike if all my other positions are max loss and you would be fine with a potential scratch for the month if it would take some max loss off.
-Obviously we won't be in the 9 handle forever so as spot VIX gets higher the 20% monthly breach risk goes up.
-It seems like the lower liquidity products (SVXY) almost factor this in and a lot of times the ~20% otm strike on the long vol credit side is the last one, meaning you can't make a vertical to reduce buying power reduction. For example even though most of my positions were SVXY short put spreads, a single 20% otm naked call was 20k BPR in Tastyworks.
-Due to the spread/liquidity issue, this type of trade might be confined to VXX.  However, when dealing with such ~.12cr spread, depending on your broker the commissions really eat at those if you don't have some bulk pricing, so again this is really a marginal trade I wouldn't have always by default.

All of that being said, this might be a strategy to consider more as we go into a higher treasury yield/lower dollar environment where VIX might reach a new normal above the 10-11 handle that we saw for most of 2017.  If we have more choppy market action then having a trade like this on might allow for single day VIX spike windows to take it off at a profit and look to re establish in a few days.

Thin value bets- flattening VIX delta

 Another poker metaphor, the thin value bet:  you might have top pair/ two pair on a potential straight or flush board, get checked to on the river and make a small 'value' bet in position.  If the opponent has nothing, they probably fold and you get no value, they could also be trapping with a big hand and giving you the rope to hang yourself with.  They could even call with a better 'hand that can't call' like a pair with better kicker.  The key case and point of this VIX trade is when they call with a slightly worse hand, and pay you off with the 'thin value.'

I think it was Phil Galfond who said 'if your thin value bets never get called, then you aren't thin value betting enough.'  This is where I'm starting from in this trade idea: yes we are adding some risk, but over thousands of hands (or trades), we are trying to boost expected value/yield/pot odds/whatever metaphor you're on.

This goes back to a post I made recently with VIX still in the 9s, I was examining the max monthly SVXY up moves for the product's history, looking to kind of bet on the decay 'cap' given the mechanics of /VX rolling to spot:

My finding was that with spot VIX under 10, SVXY never had a monthly gain topping 15%, which is coincidentally right around where the option chain ends on a lot of cycles.  (Almost like they are trying to tell us something).  That being said, the last strike is usually at the 15% mark, but with no strike after that, you can't create a spread to reduce buying power reduction, and for SVXY nosebleeds the liquidity/spreads are horrible so you would have to probably hold til expiration and take the hit either way.  (And obviously this 9 handle soft cap trend might not continue going forward)
On the BPR point, I was again looking at SVXY calls today and even though I have a couple hundred long deltas, it looked like there was no BPR offset (on Tastyworks at least), so a 150 short call was like 20k bpr.  (this was around the 15% mark if you are reading this in the distant future).

In the search for yield I went back into the more liquid VXX to look at the numbers with us now in the 11 handle:

Obviously there are more 15% breaches when you go from 9 to the 11 handle, but when looking further at the roll yield/roll premium/contango (/VX to spot, whatever you want to call it) for some of these days, the front month difference was more pronounced than now with usually over $1-1.50 between spot and /VX for ~30 days.

Here is one such day from the above spreadsheet where 1 month from this date VXX lost ~20%

Given the current term structure, the roll yield has been around $1 or less for the average 30 days, so that lowers the mechanical chance of an insane 15% breaching run.


Given all this I bit the bullet on VXX Feb 23 23.5/22.5 short put spreads for .12c credit, this being my thin value bet. (on 1/25/18)  Given the data its a marginal ish trade (right on the 15% decay edge and the %ROI takes a hit due to commissions at the low total premium levels unless you have some insane volume with a specific broker), but is effectively flattening my total short VIX delta at a credit.  If I have all this short VIX delta, I'm at least tickled to try to squeeze a few more drops out.

Historically I've been more scared of the VIX downside than upside (or reverse for SVXY) because with spikes it will come back but if you are long VIX it might never come back, and the only adjustment when it aggressively grinds against you is to move up your short VIX strikes and add more risk for incoming spikes.  All that being said- if this is breached,
1. it is statistically unusual, and
2. the majority of the short VIX portfolio is going to be hitting max profit way sooner and compounding as I keep rolling up and out.

Again, this is a complement to the short VIX portfolio, I am still negative delta on VIX, and the max loss to the VIX downside is only ~1/15 of my VIX spike risk.  I'm just dipping the toe in the water, so this is possibly something to leg further into.
Additionally, if you care about macro factors such as the lower dollar index and increasing bond yields and think the heavy decay of 2017 with VIX in the 11 handle might not continue with these changing conditions, this might be a reasonable idea.

Overall, this is basically a very skewed iron condor structure, but more entry specific in that we're only adding the 'long' VIX deltas with a specific futures structure and won't statically keep it on if there is a VIX spike, and the max risk is still heavily skewed to the VIX spiking side, so even a max loss on the VIX downside is still OK yield for the year.

Any thoughts friends?