To good to be true?

[SoCalOptionsWriter]

Ok, I have bought two of each of the above UVXY LEAPS puts for a total of $3,634.40. Now if I let them all run until expiration/exercise/assignment, I should collect about $7,400 in what will amount to two to three years of staggered holding time. Am I missing something -- besides regulatory risk and issuer risk? It's an infinitesimally remote possibility that the puts will not fall deep ITM by the expiration date; indeed, reverse splits, as one has already done (real strike price is now 10X or 40), seem very very likely, no?

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[Statistical Trader]

Your option will also be adjusted if there's a split / reverse split.

eg:
UVXY @ $13
Buy put with strike = $13
Assume no change in UVXY price; still at $13.
UVXY splits 2:1 to $6.50.
You neither made nor lost money due to the split.

So, you're betting that ignoring any splits / reverse splits (because they will be accounted for) UVXY will decline sufficiently below the stated strikes to account for the cost of purchasing your options and give you a good return. (Maybe your point was just that the product tends to go down in price a lot, necessitating the reverse splits. I take that as a fair point.)

It could happen. I did the same with VXX in March/April 2020 for ~ 2 years out (in my discretionary sub-account). I made money. Not sure if it was the best trade ever, but it worked out profitably. I closed the positions on Dec 31, 2021 and Jan 4, 2022 (tax reasons) because there wasn't much room left to profit and yet there was risk of losing all the profit if we had a VXX spike.

The closer to expiry, the less "juice" is left to profit from and the downside risk grows, so it's good to be careful. If vol spikes leading up to expiry, there go the profits. If vol spikes after entry, you suddenly have a large hurdle to get over to get back to profitability. Take a quick look at UVXY over 3 years... it wouldn't take much of a spike in VIX to wipe out all profit and leave the options worthless, if the timing isn't right.

As for buying them now, I don't think it's the right timing, but to each their own. Good luck on the trade. I hope it works out for you.

 

[SoCalOptionsWriter]

Well, as to your last point, UVXY would have to spike to above 40, to OTM on the (UVXY1) LEAP expiring in January. Not likely, I think.

I didn't add this to the original post, but I have also trimmed the overall basis by about 5% by selling OTM very low-priced UVXY puts.

 

[Statistical Trader]

Well, as to your last point, UVXY would have to spike to above 40, to OTM on the (UVXY1) LEAP expiring in January. Not likely, I think.

Looking back at what I wrote, I don't think I expressed myself very well: the issue isn't so much the option expiring worthless as it is the option expiring worth less than what you paid for it! (You can cross out "leave the options worthless" and replace it with "leave your net position underwater" in the second to last paragraph.)

These are very expensive options (specifically because the VIX term structure is often in contango, UVXY often erodes quickly in value and so they cost a lot.) Because the options are expensive, they have to expire heavily ITM for purchasers to be profitable. You're paying a lot of time premium.

I don't know when you bought or how much you paid, but today the mid on the UVXY1_4_P was about $2.75. So, to break even, someone who bought today will need UVXY1 to close below $1.25 in Jan. ($4 - 2.75 = 1.25) That's equivalent to $12.50 on UVXY and today UVXY is trading in that ballpark. So, you'll break even if UVXY is at around the same price in January as it is today. You'll lose if UVXY goes up... virtually at all. Granted you won't lose the entire amount unless UVXY spikes to 40, as you correctly point out.

Note that UVXY is (slightly) higher than it was at the beginning of this calendar year. For nine months it has been between about $9 and $22. It wouldn't take much of a spike to make this a losing trade.

Also note that the VIX futures are NOT in contango right now, so you don't have that force to erode the price of UVXY at the moment. If every VIX future's price froze in place for the next 3 months, UVXY would still rise. You need VIX futures to drop and/or the VIX term structure to return to contango and stay there for a while, ideally both.

I'm not saying your call is wrong, just that there are lots of things to look at here. This is not a "normal" option on a "normal" contract... and so its pricing is unusual. It's not "too good to be true," but neither is it quite as it seems, perhaps.

 

[tooriginal]

Something I have noticed with VXX before it broke is that its IV was correlated with the ETN price. So being long vol via puts is working against you. I had some delta negative flies that were doing well before it broke.