Wednesday, April 26, 2017

Musing on Short Vix Verticals

Investing is never done or 'solved,' (although I think short VIX is getting pretty close), so I'm constantly musing on improvements and changes both to make strategical sense as well as help psychologically.
Tastytrade had an actual specific short VIX segment recently, suggesting straight VIX option verticals over naked.  They basically compared P/L and drawdown of short 50 delta/ 10 delta VIX calls, and 30 delta/ 10 delta VIX calls, with the % of time VIX is in each range and the P/L.

I even emailed back at them yelling that if you fully combine all the data across VIX segments (low, medium, high volatility), the strategy of buying the long option wing slightly underperforms.  This should be obvious, as that is the function of long options, but I was surprised they would  post this as a suggestion. 

I think was was missing a bit of the forest here, absolutely tunnel visioning on P/L, when the huge components of not only max draw down but buying power reduction were the main elements in play. 

Especially with a small account, the minimum size of a tranche or max loss is very important as that is what determines how fluid you can be with legging in and out of trades.  For example, with pure naked short puts, I was already at about my max cash allocation for low VIX going into this last 2 weeks which were very choppy.  With a smaller max loss per tranche, it is much easier to distribute capital and average down in all conditions.

 For example, lets say a naked short 130 SVXY call is going for ~4.50, tying up a 12550 max loss.
Adding a <5 delta long put on there, say the 80 put for a generous .50 (but probably less),  brings the max loss to 4600. 
For a monthly expiration, we could be going from 4.50 in premium risking 12550 to 8.00 in premium risking 9200.  

This brings me into total stock/option buying power, which is a function of the broker but also the overall strategy.  My core strategy using SVXY puts comes with the expectation of getting assigned, meaning we will be in a higher vol environment when things are going bad, so the other half or more of the account will be able to average down in a better pot odds scenario.  When doubling up the amount of notional contracts by lowering buying power required, this will probably end up dipping deeper into broker margin in extreme cases, but again, those will be the high yield high VIX market extremes.  

Margin is there for a reason, its allocated by the broker's risk management structure, so I'm starting to view that as using all parts of the buffalo.
Especially if you ever have the vision of managing other people's money or really turning this into a business, which I know a lot of options posters point to- If you aren't maxing out your current resources (current broker), will you suddenly be ready to switch up your leverage style later?  This permeates all business/life/goals- can I be doing more, optimizing?

One final musing on vertical spreads in general, kind of a recap of my journey-
When I first started options I watched from videos that "you always want to start with a vertical spread," it is risk defined and can be done with a small account.  Unfortunately I think viewing it as "above this strike- GOOD, below this strike- BAD" kind of stunted my options growth.  I wasn't really in tune with the full scope of your break evens as the strikes widened, the goal of short puts for assignment and then selling calls against stock, and overall account management.
When my account size got a little bigger to do naked SVXY short puts I was seeing the trajectory of decay on naked options, the fuller view on management possibilities- rolling, adding opposing short calls, etc. 
This was all great and now I'm looking further again, possibly full circle- The Hero's Journey-  Now combining all the strategies of naked puts, I'm looking to use the full buying power reduction of verticals again, combined with a better use of margin for more fluidity in legging entry.

Ok that's all the rambling for today..

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