The Option Pit Method Sharp Bets VXXUVXYSVIX Option

The Option Pit Method Sharp Bets VXX/UVXY/SVIX Option Pit

What we will cover • • What is VXX/UVXY/SVIX? What moves VXX/UVXY/SVIX? When will VXX/UVXY/SVIX move? How to trade VXX profitably

Trail of the VIX • The first thing to remember about the Volatility ETP’s options is that they are: options – on an ETP • From VIX futures – on the VIX index » from option volatility » on a cash index……. . . Aaaaahhhhhhh » That try to predict forward volatility

Trail of the VIX S&P 500 Index S&P 500 options S&P 500 Index Volatility VIX ETP Options Trade! VIX Index VIX ETPs’ VIX Options VIX Futures

How VIX futures move The Option Pit Method “VIX futures price on the accuracy” of VIX cash Gravity Rules!

What the heck is the VXX?

VXX/UVXY • The VXX or the i. Path S&P 500 short term futures ETN attempts to replicate being long VIX futures with a constant duration of 30 days • The UVXY seeks to double the performance of the VIX near term futures – As you will see from the chart there is considerable slippage in the product

Trading UVXY • I am not covering selling options in UVXY today • What we want is to find time to price a “burst” in UVXY either up or down • The decay is known but it can be very sensitive around the VIX expiration

VXX/UVXY

VXX Facts • VXX buys VIX futures and holds them as an asset in the ETN – Barclays can change the rules if it wants (see SVXY and UVXY) but so far not – VXX does NOT BUY VIX cash • So we need to learn to price VIX futures – 200+ page prospectus http: //www. ipathetn. com/US/16/en/details. app? instrument. Id=259118 – VXX goes out of business slowly, but moves up fast

VXX/UVXY/SVIX allocation of VIX futures VXX/UVXY/SVIX spends it’s time Buying and selling VIX futures in A set amount each day. VXX/UVXY closes a near term future And buys the next term each day for a Net long position in VIX futures SVIX closes a near term futures and Sells the next term future each day For a Net short position in VIX futures

VIX futures move

The Roll Yield “Roll Yield” is just an estimate of how much the VIX futures will decay over a period of time -it is like option decay -it is “arrested” when VIX jumps -it can come back when VIX falls

How to trade VXX profitably • The Vol ETP’s move at different speeds. – What we at Option Pit call a “vol shock” where a rapid change in the VIX and VIX futures causes the Vol ETP’s to move in larger clips • This can be up or down – What we at Option Pit call “vol drip” where a slower change is based of the relative price of VIX futures and VIX cash. • This can be up or down and is roughly “roll yield”

Trading the Volatility ETPs

XIV/SVXY-The Inverse Vol products • XIV (SVIX) was an inverse VXX What Zone does SVIX become interesting? XIV went to 0 in Feb 2018

Old XIV is new SVIX • A nice trade in a higher VIX Zone in contangoeasy to be early • Theoretically could go to 0 (http: //app. velocitysharesetns. com/files/prospectus/PRICING_SUPPLEMENT_No__VLS_ETN-1_A 36_long_form_2. pdf) • Fits in an IRA • Shorting Volatility with no option decay • When falling from one zone to another • The Pitfalls are it can delist on a giant spike in volatility so protect or wait until VIX is already dropping Protect with short term VXX calls but it will only be a partial hedge Why? Essentially you are buying a put or near straddle We will walk through an example

Create a VXX trade • Direction of gravity • What is the potential downside • Long term or short term