An Income Strategy That’s Also Portfolio Protection

Options
by Ryan Zeldin

Selling puts on the Proshares Ultra VIX Short-Term Futures ETF (UVXY) is one of my go-to trades when implied volatility is high and I think it will stay elevated in the near term.

UVXY is supposed to correspond to 1.5x the performance of the S&P 500 VIX Short Term Futures Index. The short of it is that UVXY should go up when implied volatility goes up. Therefore, if you are selling puts and volatility stays high, you should realize all of the premium of the put sale because the put option should expire worthless.

This trade can lead to a sizeable short-term gain because the implied volatility of the options is high. Volatility can move around a lot day to day; therefore, the options are priced accordingly.

Without getting too into the nuances of the product, this is not a trade that you would necessarily want to hold for a long period of time. Implied volatility almost always resets lower in the long run. Therefore, this ETF is essentially designed to gravitate towards zero over time. However, if you time it right and know your exit or roll strategy, UVXY can lead to immediate gains, far faster than simply trading options on individual stocks or indexes.

If I were to put this trade on today with UVXY at $15.80, here’s how it would look: Sell June 10 expire 13 puts @ $0.65. That’s a 5% premium relative to the strike price on a three-week option. The break-even point is $12.35 (-21% from the current level).

Another reason why I like this trade so much is that even if the trade goes horribly wrong and you are left being assigned shares from the put or simply closing out the option it would most likely mean that the equity market has rallied substantially. Therefore, my overall portfolio is, most likely, up a significant amount that would dwarf whatever the the profit or loss was on this trade. If you realize all of the profits from the put due to volatility staying high, it most likely means that the equity market is flat or lower at which point this put sale acted as a nice short term hedge on your portfolio losses.

Author: Ryan ZeldinRyan Zeldin has spent the last 20+ years trading a plethora of derivatives with a focus on equity options. Ryan spent the first decade of his career as a market maker on the floor of the CBOE. Ryan spent three years trading options on the QQQ (Nasdaq 100 ETF) and 8 years trading SPX (S&P 500). Ryan managed a multi-million dollar book consisting of futures and options managing risk during unprecedented volatility. The last 12 years, Ryan has been the lead derivative analyst at a $75 billion asset manager. Ryan has recommended, executed and managed the positions for a variety of funds, including a global multi asset allocation fund that was a heavy user of a variety of strategies focusing on equity index options. In his free time, Ryan enjoys playing golf and other sports, but mostly watching his four kids play their sports. And, obviously, Ryan is extremely passionate about capital markets and all things trading.