In this post we will take a look at an example UVXY call spread. We will take a look at a winning and losing trade. The key to profiting from movements in the VIX is timing. Please take a look at my SeekingAlpha articles on contango and backwardation for more information on how I like to time movements in the VIX futures.
The timing of call spreads in UVXY is key. If you do not understand VIX futures and how UVXY operates I have a library of educational articles listed on my SeekingAlpha page.
The call spread strategy is a way to profit from UVXY falling while protecting yourself if things don't go as planned.
We are going to focus on two calls:
First the Jan 15 - 2016 $40 Call
Second the Jan 15 - 2016 $80 Call
I like to use options that still have a little time until expiration. You may also use this strategy on options that are much closer to expiration.
The only reason you would lose with this trade is if you executed the strategy to early while the VIX was low and also sold early.
Initiate trade June 24th
Sold 1 $40 call at $8.50
Bought 1 $80 call at $4.40
Net credit of $410 less commissions.
Closed out trade early on July 8th
Bought 1 $40 call at $20.78
Sold 1 $80 call at $11.00
$40 call: Loss of $1,228
$80 call: Profit of $660
Total: Loss of $568
Again, as far as timing goes, I recommend reviewing my contango and backwardation strategy listed on SeekingAlpha.
Initiate trade on July 6th (not perfect timing but you thought this would be a good time to short the VIX)
Sold 1 $40 call at $19.40
Bought 1 $80 call at $11.00
Closed out trade on July 14th
Bought 1 $40 call at $8.85
Sold 1 $80 call at $4.80
$40 call: Profit $1,055
$80 call: Loss $620
Total: Profit $435
This strategy is better than selling naked calls because you eliminate the unlimited loss potential and manage your risk. Yes, you do lose some of the reward, but one shouldn't be greedy when trading volatility.
Thank you for reading and have a profitable week!