S&P reversal to new highs soon. Notes on the chart. For a long time I thought a big correction was imminent, but I now think this market is ready to move up to the next level.
SVXY
PLANNING FOR THE FADE OF VIX/VIX DERIVATIVE SPIKESStarting in April, I started to put on long dated long-volatility plays, using dips in VIX as my guide for VXX setups. Now I'm looking ahead to what I should do to fade a spike. As previously noted in posts, I look to VIX as my guide for trades in VXX, UVXY, and SVXY, since these instruments suffer from contango and, because of that, it's difficult to call "levels" in those instruments.
Fading volatility products can be tricky for a couple of reasons, not the least of which is the fact that "the ceiling" is no where near as clean as the floor and the fact that the implied volatility of volatility collapses as price declines (the inverse of what happens, for example, when SPY declines -- implied volatility increases ). In scenarios where I anticipate a volatility collapse, I generally want to use a premium selling strategy to take advantage of that; the converse where I anticipate an implied volatility expansion. So, how and where should I do that in VIX/VXX derivatives?
As a rather crude guideline, I'm looking to fade either VIX or VIX derivatives at VIX between 20 and 30 (naturally higher is better) with a particular focus on something above 25 (that late August 53.29 spike looks "anomalous" from where we're sitting now, but you never know). That's the "where."
Because this is a volatility contraction situation, I'm looking at premium selling setups to fade, whether they be in the form of a simple short call credit spread (in VIX, VXX, or UVXY) or something like a diagonal, where the back month expiry is later than the front month, so that I can roll out the short call to collect additional credit if the setup needs additional time to revert to its mean. (Keep in mind that SVXY is an inverse, so you would either go short put credit spread or put diagonal). And that's the "how".
In all likelihood, I'll look to VXX, UVXY, or SVXY for this particular setup, since I'll get the added advantage of contango working for me to the short side on the fade -- something I won't get if I go with VIX options ... .
A Sidenote: I know that some people want to short VIX/VIX derivatives with longs puts. I could contemplate doing that if we get a spike to VIX 30 and if, for example, VIX 20 puts become incredibly cheap (<.10 contract) and you can get them in an expiry that allows for plenty of time for a reversion to sub-20 levels ... . Naturally, you just have to look at options pricing if a spike like that occurs to see if a "lotto" trade with a reasonable chance of success surfaces.
UVXY OPTIONS -- NEARING DANGEROUS REVERSE SPLIT TERRITORYBecause UVXY is subject to contango, it periodically has to undergo reverse splits to keep it from going to 0. The last split occurred in May of last year, when UVXY was sub-10 and it is getting close to that area here.
In a nutshell, reverse splits wreak havoc with options positions ... . I won't go into the nitty gritty details here, but the Options Clearing Council (OCC) has a specific manner in which it handles options in reverse split situations, the result of which is "non standard contracts" with potential liquidity issues.
Because of these concerns, I'm shying away from playing UVXY via options at all until after the split occurs or there is a volatility pop of sufficient depth to save it temporarily from a split. There are, after all, other instruments in which I can go long volatility without the headache of a potential reverse split occurring in the middle of my trade -- SVXY short (which appears to have dodged the split bullet for a while), VXX long (although there are even concerns with reverse splits in that instrument if volatility continues to hang in at low levels), and, of course,VIX options.
SPY Call Credit Spread (Short at $208)May credit spreads expired. Good R/R on August options (for a credit spread)...close to 1/1. My break even is at SPY=$210.20.
While my hypothesis has been evolving, I still see SPY as volatile. The August options provide some flexibility to adjust if prices go up to $208-212 range and continue to profit if SPY stay in current range.
1W:
1M:
SPY - Evaluation EvolutionMy opinion, if you objectively examine the charts, I don't see how you can be an "All In Bear" or an "All In Bull" regarding long-term projections.
The RED Line is a key resistance. Even testing it is bullish the long term even if it holds.
1M:
On 1M...Candles long shadows (pinbar) demonstrating strong bullish bounce off the key support each time it has held. Technically, we have had LH & LL since 5/2015. However, the repeated price action at the 182-181 support makes it difficult to count on continued LLs without clear confirmation.
A case can be made for both a Bear and Bull bias. It was more difficult to make a case for a Bull bias a few months ago and now it is getting increasingly more difficult to be a all in Bear.
My stance...I'm still expecting a ranging market. A break above $214 or below $180 would force me to re-evaluate my bias.
LOOK FOR VIX SUB-13 TO REENTER LONG IN VXX/UVXY OR SHORT SVXYHaving exited a VXX short call diagonal setup today, I'm looking at further opportunities to get back into a long VXX or long UVXY setup, and -- as previously noted, I'll be looking to VIX for guidance, since both VXX and UVXY suffer from contango and their "bottoms" are slippery slopes that are gradually eroded by contango over time. In other words, what's a "bottom" now in VXX and UVXY may not be the "bottom" next week or next month or the month thereafter if we have prolonged low volatility.
You can naturally also short SVXY on a VIX sub-13 level, since it's an inverse ... . In its case, its top is the slippery slope.
SVXY -- Long via March 18th 31/35 Short Credit SpreadMarch 18th SVXY 31/35 ShortPut Credit Spread
1.64/$164 Max Profit Per Contract
Using KAGI to swing trade volatility for multiday holdsSee notes on chart.
Works for those who don't have time to watch volatility intraday. Doesn't require tracking contango / backwardation.
*edit: prices based on close price of SVXY on the day of the Kagi transition.
Contango about to come back to volatilitySee chart.
Bears really need to move things down on the indexes or contango will return to rolling volatility plays.
See notes on chart.
* note: looks like TradingView, in its wisdom, is now resizing indicators from how publishers intended them to be zoomed. Will follow up with another graphic later.
SVXY -- SHORT VOLATILITY PLAYIf you know anything about volatility products, you'll know that -- unlike VXX and UVXY, SVXY increases in value as volatility declines (it's an inverse) and suffers from "inverse contango" which ultimately means that, over time, SVXY's value will go to infinity in the absence of backwardation, splits (it's undergone two since inception -- a 2/1 in 2012 and a 2/1 in 2014), or a massive increase in volatility, which could arguably reduce its value to zero in fairly short order.
For purposes of this play, however, you need not fret about the long term effects of "inverse contango" and "backwardation" -- all you need to really know is that as volatility declines, SVXY rises.
At this point in time, we're at a fairly significant low in SVXY, and I'm betting on volatility contracting somewhat over the next 40 days or so such that SVXY finishes clear of my 35 short put strike at expiration or at a price that allows me to take the trade off for 50% max profit prior at some point between now and then:
Feb 26th 30/35 short put vertical
Probability of Profit %: 55%
Max Profit: $201/contract
Buying Power Effect: $299/contract
Break Even: $32.99
Naturally, if volatility does not contract such that price moves above my short strike, I'll roll the setup for duration and credit.
Short SVXY durring high VIX periodsSVXY pays a price when VIX is high (>16).... even when SPY is increasing (see arrows). This is due to rollover but not to be confused with VXX decay due to contango.
S&P 500 showing signs of near-term collapseComparing a few of the technical patterns that occurred before and during the massive corrections of 2000 & 2008, the S&P is showing signs of another large correction looming. (Again after ~ 7-8 years of bull-run).
These types of monster moves play out over a period of months / years and therefor it would be diligent to observe these and other indicators over the next few weeks in order to determine whether a big move to the downside has in fact already started.
