CPI is 3% – Stocks Like It, UVXY Doesn’t

Andrew Giovinazzi

Yo Pit Crazies,

I spent most of my morning on Wednesday closing trades. 4 of the 6 wins in the Rundown had my fingerprints all over them, so I’m going to say it was a good week.

I do have a solid collection of SPDR S&P 500 Trust (Ticker: SPY) puts going out worthless, but I own them for credits. Needless to say, I don’t think the big selloff is happening this week or next.

What did selloff was the ProShares Ultra Short VIX Short Term ETF (Ticker: UVXY). I alluded to this yesterday talking about the short term strangles in SPY. This is the trade:

TRD: SPY $441.09

1X BTO 1 SPY Jul14 444 call and 436 put 1.90 @ 1.88 @ 3.50

1x BTO UVXY Jul21 18.5 put for .65

Those worked out well with the call closed around $3.50 on a $1.90 entry price. That left me with the SPY put and UVXY put for a nice $.95 credit.

The big question is … what can I expect out of the UVXY put I got paid to own?

The Secret is Pricing the Downside

UVXY decays because it owns VIX futures with some leverage. Note above that the UVXY spiked when VIX spiked but held out until the CPI news came out. Then traders tanked VIX and the futures and related products with it. I still have some 18.5 level puts in UVXY in the Trading Desk.

When I estimate how low UVXY goes, I want to see how much VIX future decay can take it down. I estimate with my Edge Hunter sheets that UVXY can get to 16.00 as a terminal number with VIX 13. That sets up my put close around $2.25.

Remember – when VIX is not going up, all products connected to it are decaying.

Find ways to get the market to pay for your options. UVXY is great at that. If I expect Implied Volatility to decrease, UVXY puts are a great vehicle for that.