Tuesday, July 14, 2015

UVXY Call Spread

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

Chart courtesy of Optionshouse.com

Second the Jan 15 - 2016 $80 Call

Chart courtesy of Optionshosue.com

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.

Losing Trade

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.

See below:

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

Winning Trade

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!


  1. Hi Nathan, if using CFDs on margin is available is there any advantage to just going long SVXY rather than using UVXY options? Thanks

    1. Hi Rosed, I don't know if CFDs are available for VIX ETFs. To be honest with you, I don't really know anything about them.

      You could go long SVXY instead of using the UVXY options. The benefits, to me, of short UVXY is that you have the 2x leverage on your side. SVXY can also take a big hair cut during periods of rising volatility and large swings in general.

    2. Hi Nathan, I'm in the UK & can use SVXY cfds so can leverage to my desired level of risk. I've been using Bollinger Band violations combined with backwardian info from vixcentral to time entries into SVXY. Also on my platform UVXY options are american style so if I could end up being exercised against at any time & be left with a call in an unbalanced position...

    3. You do have that risk with American style options. I think the bollinger band violations are a good indicator right now, but maybe not be the best signal in a declining market. I would monitor the contango and backwardation levels and use those as indicators instead. My latest article on SeekingAlpha goes over that and I have a few others on contango and backwardation.

  2. Thanks Nathan, I read them with interest. With so many of these Vola ETFs only being around since post 2008 it's harder to look for strategies for declining markets!

    1. Hi Rosed, I would look at some of my SeekingAlpha articles. I mainly focus on the downside of volatility, which is usually reserved for flat or rising markets. In a falling market trying to time a rise in volatility is risky but shorting volatility once market conditions become oversold, is a good strategy.

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