Selling calls on UVXY....OTM

TradingDemystified said:
I am sure you are also aware of this so if you are just ignore my comment but do you really understand the implications of an ETF whose return is 2x daily?
Take this example, a fund that returns 2x daily on VIX, let's call it UVXY (I know it does it with futures but bear with me just for this example)
Day 1: VIX=10, UVXY=20 .... VIX goes to 11, so a 10% increase
End of Day 1: VIX=11, UVXY=24 (20 + 20% of 20)

Day 2: VIX=11, UVXY=24 ... VIX goes to 13.2, so a 20% increase
End of Day 2: VIX=13.2, UVXY=33.6 (24 + 40% of 24)

Day 3: VIX=13.2, UVXY=33.6 ... VIX goes to 26.4 so a 100% increase
End of Day 3: VIX=26.4, UVXY=100.8 (33.6 + 200% of 33.6)

Day 4: VIX=26.4, UVXY=100.8 .... VIX goes to 39.6 so a 50% increase
End of Day 4: VIX=39.6, UVXY=201.6 (100.8 + 100% of 100.8)

SUMMARY OF 4 DAYS:
VIX went from 10 to 39.6 an increase of 296%
UVXY went from 20 to 201.6 an increase of 908%

I am sure we all understand this but sometimes we lose track of this.. twice the daily return on a sustained move will lead to MUCH MUCH MORE than twice the return over a longer period and that is where the risk lies with these products and a reason not to stay away from them but to be aware of this and maybe never have naked short calls on them (since a single sustained move could easily lead to loses multiples of what we believed we had)

Of course in real UVXY there is a daily rebalancing (rollover) effect (selling front month futures and buying back month, which is normally in contango) which makes it tend to drift lower on markets with low volatility but with a sustained rally like the one described in the example one would think that the term structure of VIX would move into backwardation easily, making UVXY go higher even faster (since it would be selling expensive front month futures and buying lower back month futures).

Bottom line: Understand these products VERY WELL before you put on trades on them... especially naked
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I agree, extreme danger right now. Maybe this isn't "the big one" but it seems to me there is even more to worry about right now than there was in 2015 when UVXY went up 350% and probably even 2011 when TVIX went up 650%. I was nearly taken out completely in 2015 and know several people who were. Including one who naked sold $6,000 worth of UVXY calls that went up to $1,200,000 in value. amazing.
 
wekilishorts147 said:
I was nearly taken out completely in 2015 and know several people who were. Including one who naked sold $6,000 worth of UVXY calls that went up to $1,200,000 in value. amazing.
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And guess who ends up being on the hook for that loss? The broker... and then in the end you and me, because they will increase fees etc.

- the stupidity of some affects us all -
 
An acquaintance of mine recently got approved for naked options. Added some cash to his account, so he had 45K or so in cash. Sold 6 December $91 UVXY calls naked for 3.30, proceeds of 2K.

So he has cash of 47K in the account and naked short 6 calls.

I advised him to close them immediately at tomorrow's open. Because while it is very likely UVXY will close under 91 in December, it's possible it could have a big spike first. If UVXY went to 100, those calls would go from 3.30 to about 40 I would think. And in a 2011 type scenario where UVXY goes to 225, the calls would be worth about $150 each or $90,000, meaning his 45K account is now worth NEGATIVE 45K.

So am I being alarmist, or should be shut down immediately tomorrow? Even if the calls are around 5 or 6 he will only lose 5% of his account, and live to fight another day. I told him all the old horror stories but he has been paper trading and making bank, so not interested.
 
JackRab said:
And guess who ends up being on the hook for that loss? The broker... and then in the end you and me, because they will increase fees etc.

- the stupidity of some affects us all -
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Yes, the broker ate the loss on those accounts- and I fear we're going to see some more if this North Korea thing takes off- also I wonder why brokers allow naked selling options?
 
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