NaughtyPines
Short

THINKING AHEAD TO (YET ANOTHER) UVXY REVERSE SPLIT

AMEX:UVXY   PROSHARES TRUST ULTRA VIX SHORT TERM FUTURES ETF
As I thumb twiddle a bit here waiting for another VXX             weekly expiry to open up and for a UVXY             reverse split, I'm pondering potential long-dated plays in UVXY             I can put on immediately post-split that are basically "set and forget" plays.

I have seen evidence in both open interest and volume of people playing both ends of the stick at split when the price of the underlying -- in all likelihood -- will be at a high point, after which contango erosion and/or beta slippage will ensue: (1) buy long-dated (as long as you can go) at-the-money or deep-in-the-money puts; or (2) buy long-dated out-of-the-money puts for about the price you would pay to put on your standard 3-wide long put vertical (or less; some folks literally buy the most out-of-the-money, cheapest long puts they can lay their grubbies on). Because I'm literally not made of money, option (1) is out -- deep-in-the-money is just plain ass pricey on a per contract basis, and I question the usefulness of paying more than you have to in intrinsic and/or extrinsic value when the play is that the underlying is going to erode from that point forward over longer time frames -- just being deeper in the money doesn't necessarily pay more in that event unless you are paying less extrinsic by going that way.*

Consequently, the play I'm going to put on immediately post-split is out-of-the-money long puts in a strike where I'm paying around 2.25 or less per contract (obviously, the less, the better) in the longest dated expiry that exists at the time of the split.** Naturally, it's difficult to price these out at the moment, so I'll just wait for the split and price them out then ... .

* -- The general rule with most underlyings is that the deeper you go in the money, the less extrinsic you should pay. However, if you want to buy a Jan '20 35 long put at the moment (an extreme example, I know), it'll cost you 29.95 at the mid. 35 (the strike) minus 9.67 (current price of the underlying) = 25.33; 29.95 (the price you'd pay for the long put) minus 25.33 = 4.62. That 4.62's extrinsic value you're paying for up front, and that will decay over time.
** -- I can also see the potential in just buying deep out of the money long put verticals instead "on the cheap." Having a short put aspect as part of the play will naturally offset some of the extrinsic you're paying for the long. To a certain extent, it's a matter of how much you want to stick out there for how long ... .
I back-tested this idea all the way back to VXX and UVXY inception. Did the same for SVXY. My rule of thumb for VXX and UVXY is to wait until 1545 on the second day to enter -- this is a discretionary decision, obviously. I rarely go beyond 180d in duration (targeting an estimated 150d of "decay" in the underlying), but never less than 110d. I will roll if I have to, typically another 90d but may take 60d, depending. (SVXY parameters are a little different.) Your willinginess to share your thoughts in such detail is a welcome confirmation of my own observations as well as a great source of info for new ideas / lines of inquiry. Many thanks.
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NaughtyPines Jaymanicus
@Jaymanicus, Good to know. For this type of trade, I haven't seen a ton of discussion around about what one should be looking for, but I imagine that if you want to be purely mechanical, the starting point would be to estimate where price of the underlying might reasonably be in, for example, 180 days and then look at buying that particular strike or the strike that will yield a break even around where price will conceivably be. Others I've seen do this trade simply ask themselves how much they're willing to hang out there for an extended period of time and then buy the strike that meets their power power usage/tie-up appetite (which seems to be somewhat less than mechanical).
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Jaymanicus NaughtyPines
@NaughtyPines, this is very similar to one of the core approaches that I use. UVXY has decayed at a monthly rate of about 17% in 2017. My rule of thumb is to look for 10%. If it isn’t there by my planned “cut off” date, I assess. Thanks again!
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