The presidential election trade became profitable literally overnight. 70% of short option premium vanished in 3 days. Now 11 days later 99% of premium has disappeared but we still have 28 days until expiration.
If you traded only stocks and no stock options then with regard to risk (little pun intended) you have no options. When the position was initiated the main trade idea was that UVXY is overextended and should fall shortly after next POTUS is elected. Since then UVXY has fallen about 25%. And with it your probabilities of ETF moving either up or down have become more or less 50/50. As a stock trader you should exit the trade. Because you don’t have any statistical edge left.
Option traders on the other hand are smiling. They could have been 43% wrong and still be in profit (against stock traders 43% loss of capital). They got profits from UVXY fall (delta component in option pricing). They also profited from implied volatility crush (IV component) and also 11 days worth of time decay (theta component). And since UVXY could now go up, down or sideways we can adjust the position to accommodate all those moves simultaneously.. for more profits (against stock traders closing out from further profits).
Your.Capital found nice adjustment for existing position on friday 18th of November.
Here’s the position (one lot) before adjustment:
It has negative 93 delta (which means it gains $93 for each UVXY 1 point down move) and no short option premium left (Total Air column is almost 0).
And here it is after adjustment:
We now have over $724 of new short option premium (which we could gain in 28 days) and also positive delta. If you look at only delta you would think i must now be betting for UVXY to rise. But i’m not. If all option price components are accounted for after 28 days the total risk has now shifted as follows:
Trade gains additional profits when UVXY stays between -16% and +77%. Considering existing profits the whole trade remains profitable for moves from -30% up to +92%.
Max gain to current profits is $919. So there is potential for doubling profits. UVXY needs to move higher 15% for those max gains.
UVXY tends to move sharply up when market falls. And this is exactly where the bulk of gains are. Last month of the year is usually very calm in markets. Which means contango effect in VIX futures term structure and that makes UVXY lose value. Slowly but very very surely (just look at it’s long term price chart).
If this should happen also this year UVXY can lose up 16% and i’m still not giving up any gains.
Downward move is now much slower than upward spikes. That gives me time to react if UVXY looks likely to lose even more than 16%. Then i could close out the position, adjust it one more time, roll it forward into January 2017 or even further etc. There are always ways to adjust position – how & when is conveniently taken care by Your.Capital.
Best of luck to you with your trading!