codypd
Long

WHAT IS LIKELY TO HAPPEN WITH UVXY & VOLATILITY

444 5 6
Given the size of the move on Brexit, volatility futures markets are likely to hit a period of sustained backwardation.

Pictured here is what backwardation has looked like (red channels) and how it is likely to unfold now (orange tick channels).

The channels you see are drawn around UVXY/VIX. The fact that UVXY             normally loses value over time is due to contango in the VIX             futures markets. In times of crisis, the VIX             futures go into backwardation (where the price for a short term contract on something is higher than the long term price).

When backwardation occurs, UVXY             starts gaining value every day relative to the VIX             . The chart shows a period last January where UVXY             did just that. If Brexit works out as the same sort of crisis, we can expect the current UVXY/VIX ratio to move from .6 today up to .8 in 4 weeks. From there a bottom should be found and the normal contango structure (with UVXY             price decay) resumes.

How to play it? You can buy the dips on UVXY             and calculate targets based on the VIX             top you expect * the ratio for the day on the chart. You can also use the same technique to judge which strikes to pick on buying UVXY             calls. Same goes for selling puts - find a price likely to expire out of the money and collect premium. VIX             derivative premiums will appear obscenely high ... use the ratios and prior VIX             spike paths to calculate good strikes and values.

The indicator on the bottom simulates the UVXY             roll trade - the black line is the average of short term volatility prices and the red is the average of the midterm, offset by 30 days. When the black is over the red then the volatility options that are sold by Proshares that day are sold at a profit (for more than they cost when they were midterm futures ).

Keep a cool head - volatility comes and goes. Do the math and understand the structure and you can make money in either direction.
Mach2
5 months ago
"calculate targets based on the VIX" isn't very helpful if you're trying to educate. How about some formulas and examples?
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codypd Mach2
5 months ago
Take the .66 for the next monthly expiration. If you suppose a VIX range between 22 and 30 then multiply 22 by .66 and 30 by .66 and you get a range of prices. Same goes for the top of the channel. From there you can look at strikes on the option chain ad determine which are likely to expire out of the money and which are in the center of the price ranges you calculated. From the example, between 14.52 and 19.80 is your likely price range at expiration in the most conservative case (bottom of the channel).
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codypd Mach2
5 months ago
I found a trade I posted where you can see on the chart where I drew in lines for where price should hit based on these multipliers. Hit the "play" button and you will see price moves right up to one of those lines as the chart scrolls right. That shows how I apply these multipliers day to day. Hope that helps.

Long UVXY
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Algyros PRO
5 months ago
Thanks for the charts and for the market analysis.

Do you have any hints about how to draw parallel channels. Yours look very neat; whereas mine are somewhat more impressionistic.
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codypd Algyros
5 months ago
I basically use the drawing tools that everyone else uses, but when I draw a line for a channel I ctrl-c and ctrl-v it and it creates a duplicate at the same angle. Then I just drag it into place. Other factor is that these contango / backwardation trends are very orderly and can be seen without the channel lines.
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