I spent yesterday watching to see how the market would behave this week after such a good run already in the books. I made no trades in my taxable account until today when I decided to make a few adjustments. I started with UCO. My long term position still has a paper profit for me and I decided to try to add to it with an option strangle using November expiration puts and calls. Apparently I didn’t have the cobwebs out of my head when I started the day because I switched my limit orders for my puts and calls and while UCO was trading at $9.14 I sold 10 UCO November 10 covered calls for $0.35 each and received $347.36 after commissions. I meant to put that order in at $0.45 which would’ve given me another $100 if it hit. Then again I could’ve missed out. (I sold two clients’ covered calls for $0.40 without having to wait too long, but didn’t see it hit $0.45 all day.)
Right after I regrouped from my typo I sent my order for my new naked puts. While UCO was trading at $9.17 my order hit and I sold 10 UCO November 8 naked puts at $0.35 and received $342.86 after commissions. This brought my cost per share down to $7.46. While I kept my naked put strike the same as my last puts, I lowered my covered call strike by a dollar to bring in more premiums. If UCO gets over $10 and stays I’ll let my shares get called away, take the profit and start over again later.
CVS looked like it was going to take off again today, but when I saw it start to retreat I decided to take in some profit early. While CVS was trading at $30.13 I sold three covered calls at $0.85 and received $$252.86 after commissions. This brought my cost down to $30.73 so if the shares are called away I’ll end the series of trades with a profit, but will take a loss on the shares. The chart looks like $30.40 could be resistance and $29.50 could be support. I don’t expect both of these lines in the sand to hold for long and figured I should take in some premiums now in case I’m wrong to the downside. If I’m wrong to the upside I’ll probably be ready to move on from CVS at those levels.
The one that had me most perplexed was VXX. I’ve been consistently adding to VXX on its slide lower and had a hard time deciding on my next best move. My original plan was to slowly build a position up to around 10% of my portfolio and to use it as a hedge. I did that, quicker than I had hoped and then VXX kept falling below my expected floor. If this was a regular stock I might have cut my losses already, but I don’t doubt VXX will move higher eventually. The trick is I don’t know if that’ll be in a week or a year. I decided to mix it up some. I have 500 shares I’m long already and 300 more I’m expecting to buy in October when my October 20 puts are assigned. That’ll give me 800 shares which will be great whenever VXX spikes and I make up for my losses I’m incurring at the time in other positions. Until then I’m sitting on a paper loss, but working it down slowly by taking in the rich premiums. While VXX was trading at $16.65 I sold two VXX November 20 covered calls at $0.75 each and received $148.97 after commissions. This brought my cost per share down to $19.59 on the 500 shares I already own and $19.74 if I am assigned the 300 shares in October.
I didn’t want to remove my (indirect) hedge by covering all of my VXX shares, but wanted to take some money in just in case VXX continues to fall. These two covered calls would force the sale of 200 of the 300 shares I recently bought at $20, so I’d break even on the shares and pocket the premiums while the other 300-600 shares would have room to run. If VXX continues to fall I won’t sell any new naked puts until I think it has hit a bottom. That could be closer to $10 even. If that happens I’ll probably work it like I am with my UCO position and just take in new premiums each month.
Having this many long, uncovered VXX shares allows me a little more freedom to be more aggressive with new naked puts on other stocks and ETFs. I haven’t made that move yet because I’m still in the mindset that we’re due to get a step or two back in a mini-correction. Seeing today turn south made me feel a little vindicated for waiting. Now we’ll have to see how the rest of the week plays out.
Alex,
Thanks for the update. As you know, I’ve been a VXX trader from its inception. All the naysayers out there are now running like squirrels away from VXX because of their fear of the unknown, specifically that it reflects only short-term VIX futures (vs the VXZ, which goes out several months). I too was assigned at 20 and 21 last month, but it does not scare me because with the VIX being cyclical, the VXX will rise again…and fast. If you look at its chart, all it will take is one bad news item, one catalyst, and it will rise a couple of bucks in a day. Another thing the so-called VXX experts are failing to take into account is VXX’s open interest itself. It is heavily skewed to calls.
Bottom line: the VXX, although not as correlated to VIX as I would like, will not act like FAZ, TZA or the other 3X leveraged ETF’s, or like SKF or USO, in that if they fall, say 5%, then they have to increase 7-8% with the same volatility just to break even.
Hang in there and thanks for your post.
Thanks John. I haven’t watched it as long as you have, but it just makes sense that VXX will pop back quickly on the right (or wrong) news. I like to see it’s up 2.3% (mid-day 9/22) while SPY is only down 0.67%. A few more days of this and we should see the move of the masses buying puts and driving up volatility that much more.
One other thing I forgot to mention: I tend to do well by STO a few VXX near term calls. I have paper/unrealized losses of 5K because of the assigned puts I mentioned, so I’m basically daring the market to get more volatile. In effect, I’m hedging my original hedges!
Also nibbling at some Oct 35 and Nov 40 VIX calls. Can’t believe I can get these for about 80% margin allocation! If the VIX rises to 30, the VIX should, by my model, rise to at least 19.75…maybe higher. I’ll take my $5K back gladly for a potential loss of $500 on the short calls; if not, I’ve got an extra $500.