Short VIX'ing the Coronavirus

What a month- I've been in some 'low vol' calendar positions in SPX, moving strikes by the skin of my teeth, ultimately trying to stay in the game with 0 IV rank, and getting what I asked for with a ~25% UVXY pop.
I'm just waiting on the last day or so of theta and ideally getting out of these positions to move into a more midrange/short strangle vol setup.

I'm specifically waiting for the next ~1-2 weeks on the long term UVXY entry opportunities due to the timed 'incubation' period on the current Coronavirus.  If there was a wait and see moment for an underpriced tail risk, I think this could be a textbook case.  Again as I posted last time, the structural changes in UVXY might have permanently dropped the 1yr duration position value, so I would be more cautious in picking entries.   

With all that being said, and semi anticipating a further VIX spike going into this month, (and into March due to Fed/Treasury liquidity) this is one of the exact type of examples of the"life short VIX" thesis I muse about.  A chance to short a "world is ending" fear event, which these days is good for a ~16 VIX.  

  

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.  

The 2018 short VIX Odyssey

As usual I try to avoid "trade journaling" but this felt like a broader 'proof of concept' from the last few months-

 

      If you can remember back to the far left here, just before the 2018 3 month sell off AKA the "December Glitch" I was selling call spreads at the 40 short strike with ~6month duration. 
As if in a cartoon, UVXY almost instantly 2-3x'd against me, thus began my 10 year Trojan war...






Since September, I added on more to the short position and sold puts/ put spreads against it to flatten deltas, some getting back off for a scratch, some a small loss (note the huge drops back in 2019)

Ultimately that brings us back to this week, almost exactly at expiration with UVXY returning home to Penelope at 39.xx ...

Since I'm not a pure fentanyl rush gambler, I've been slowly taking off some of the short call lots for a scratch or small loss as we approach expiration , while flattening deltas with short puts, basically reducing crash/spike risk as we almost return home. (Its more thematic to fight the cyclops in the middle of the journey than to get bludgeoned right back at your doorstep)

So basically we have a 6 month scratch trade, this isn't what you point back at to clarify genius... this isn't going 100x leverage on your student loans to buy penny stocks/crypto and 20x, so who cares?

The point is the inevitability of the short VIX complex mechanically, and even a very bad trade can be managed/ flattened, but ultimately saved with duration at the beginning. 

Takeaways/ Going forward- 1yr duration

In hindsight I was happy I stayed more conservative with the 6mo trade into those Oct/Dec spikes, while some of the short vol crowd were putting on the 'traditional' ~45 day premium trade.  I did a lot of backtesting in the last year before the UVXY leverage rebalance, and was looking at the 6mo to 1yr duration, and especially now with the deleverage I would lean to the longer duration to offset the weaker decay.

I'll wait for another vol pop to re add long duration positions (we've been vol crushing for a week now), but to eyeball a trade with UVXY spot at ~40, the 1yr 40/45 call spread looks about 33% ROIC, which should be very good for a conservative annual trade.

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