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Consistent income trading options: VXX and UVXY in low volatility

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In our quest to understand trading options for consistent income, we often look for good strategies in a low IV (implied volatility) environment. One strategy often considered is to trade volatility products, such as options in the VXX and UVXY.

The VXX is a volatility product based on the weighted average of the front- and second-month VIX futures (/VX). The UVXY is 2x the VXX, which means its daily percent change is twice the VXX daily percent change.

As a derivative of the VIX, the above two volatility products are balanced daily (by selling the front-month VIX future, and purchasing the second-month future). This introduces some delay (or drag). The question: can we take advantage of this drag by buying an ATM (at the money) spread, where one option is one strike in-the-money, and the other one strike out-of-the-money); a Put debit spread?

Incidentally, the VIX futures are typically in contango; this means the front-month future is priced lower than the subsequent month; hence, a Put debit spread, in anticipation of IV going lower, makes sense.

To determine if ATM Put debit spreads are profitable as IV declines, Tasty Trade recently ran a test from January 2012 through May 2014 (a total of 30 months).

The test criteria was as follows: enter a trade when the VIX drops from above 17 to below 15; use the option chain that is closest to 45 DTE (days till expiration); buy a $1 wide Put spread in both the VXX and the UVXY; and hold the position till expiration.

The results: there were only 14 trades entered during the test period (out of 30 months). Both the VXX and UVXY had positive P&Ls ($101 vs. $253 respectively), and high percent winners (71% vs. 86%).

In conclusion, this looks like a winning strategy. However, the profit is very low, along with the number of trades (not statistically reliable). Also, while the percent winners tend to indicate a consistent approach, the low volume of options traded in the UVXY make filling trades near the mid-point unlikely.

If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.

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