This week is a further discussion of my favorite ETP (Exchange Traded Product), SVXY. We have already discussed this unusual equity. Because of contango, it is destined to move higher every week that there is not a market crash or correction. It has doubled in value in each of the last two years. If you have an idea of which way an underlying is headed, there are extremely attractive option strategies that you might use. I will talk about one such strategy this week.Terry
Check Out the Volatility in SVXY
Every week for the past four weeks in my personal account, I have bought at least 200 out-of-the-money weekly call options on SVXY, paying $.20 ($20) for each option. In every single instance, I was able to sell those options for at least $1.00 ($100), and sometimes much more. That works out to 500% a week for 4 weeks in a row. I could make that same bet every week for the next 16 weeks and lose every time and still be ahead. (As we will see below, in half the weeks in 2014 so far, my bet would have been a winner, however).
Last week I was delighted to unload t hese calls because I figured that after moving higher for 6 consecutive weeks, it might be in for some weakness. Not so. The options I sold for $100 each could have been sold later in the week for $550. I left a lot of money on the table.
I shared these trades with Terry’s Tips subscribers, by the way. They were an insurance purchase as part of a larger portfolio of long and short options on SVXY. Usually insurance costs money. I expected to lose money on it. Over the past few weeks, it paid off nicely.
An interesting feature of SVXY price changes is the weekly volatility numbers. This is an extremely volatile stock. The following table shows the biggest up and down changes in 2014 from the previous Friday’s close for SVXY.
This stock is unbelievably volatile. In 19 of the 22 weeks, it either rose or fell by more than $3 (highlighted weeks). It rose over $3 in exactly half the weeks and if fell by more than $3 in 8 of the weeks.
SPXY Changes Newsletter June 2014
With this kind of volatility, maybe buying a straddle each week at the close on Friday would be a good idea. The cheapest straddle last Friday would have been at the 84 strike (SVXY closed at $84.11) and would have cost about $3.35 (in most previous weeks, this straddle could have been bought for about $1 less – this week’s 10% rise in the stock price pushed IV much higher).
The biggest challenge with buying straddles is to figure out when to sell. If you waited until the stock had moved by $4 to sell, you could have made a gain in 14 if the 22 weeks (64% of the time) but you would be only making about 20% at this week’s straddle cost and possibly losing almost everything in the remaining weeks. Not a good prospect, except maybe if you had bought at earlier-week prices.
A better idea would have been to buy a slightly out-of-the-money weekly call, paying about $.80 for it, and selling it when you have tripled your money. You could have done that in half the weeks in 2014, insuring a great profit no matter what happened in the other half the weeks.
After SVXY rose $3 or more at some point in 7 of the last 8 weeks, however, call prices have moved higher this week (for the first time, surprisingly). It would now cost about $1.20 to buy a weekly 85 call with the stock closing at $84.11. A week ago, that same call would have cost about half as much.
This week I am not making an insurance purchase of out-of-the-money calls on SVXY. The call option prices have become too rich for my taste. I suspect that a week from now, they might be back to a more reasonable level.
For several months, the call options have been much less expensive that the put options, but they are about the same right now. In the past, traders were buying puts as a hedge against a market crash (when the market tanks, SVXY falls by a much greater percentage than the market). This phenonemon will probably return soon, and make buying out-of-the-money calls a good strategy.
I suspect that SVXY might take a breather here for a week or two, so I will be sitting on the sidelines. When call prices retreat a bit, I plan to start buying cheap out-of-the-money weekly calls once again.
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