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Today’s trade: Short volatility with out-of-the-money UVXY calls

Jeff BishopJeff Bishop ·

The back story: Volatility – or the lack of it – has been a big theme both for the market and me this summer. The VIX – which measures the expected volatility of the index for the next 30 days – has closed under 10 more times this year than in the last quarter-century. With that kind of action on the so-called fear index, I have been playing the ProShares Ultra VIX Short-Term ETF (UVXY) in different ways for months now; I spent some time underwater on those trades, but ultimately they have paid off.

See Jeff’s previous call on UVXY futures

The set-up: With the VIX having climbed above 15 yesterday, a bunch of the talking heads think the climate has changed. I don’t, and I think if the Standard & Poor’s 500 gives us a 2 percent correction, the UVXY could give us 20 percent. The VVIX – CBOE VIX Volatility Index, which tries to measure “the volatility of volatility” – topped 135 yesterday, the highest reading in at least two years and a sign of extreme fear in the VIX itself.

The conclusion: I like the “short VIX trade” here.

See why Jeff started liking the “short VIX” trade weeks ago

The play: The obvious thing to do might be to buy UVXY puts, but when UVXY starts to explode like it is now, the volatility premium goes thru the roof, and the premiums on the puts right now are outrageous, plus when volatility dies down, the value of those puts falls quickly.

Instead, I am buying UVXY calls that are way out of the money and trying to collect the premium on them.

Here’s how it works. When UVXY was $30, the $60 calls for two weeks out normally trade for about a dime, if that. Right now, they’re more like $3, all due to volatility explosion. By selling the $60 calls now, I can capture the premium.

I have to be careful here because the value of these calls will fall just as quickly as those put options if volatility dies down, but I have found this to be a good strategy if you stick with it and stop out a lot on the way up.


 Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, primarily using leveraged ETFs.  At the time this was published on RagingBull.com, he held UVXY call options which he was planning to trade as described in this article; he also held 3,000 shares of UVXY, purchased over the last few weeks as a partial hedge against those calls.

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