<p>Just covered calls and protective puts or combinations thereof. But conceptually, the risk/benefit analysis of simply buying puts or calls and holding them to expiration is not difficult to understand.</p>
<p>Ok…</p>
<p>So are you considering buying the puts? They look cheap… They might be cheap… Options can become cheap, expensive, mispriced etc.
I don’t see a lot of people trading the leaps. Maybe the pros don’t know where they should trade either…</p>
<p>I am considering it. But I’m still worry about the possibility that there is something that I am missing. I am also considering the possibility of buying and holding a fixed amount of xiv, taking profits and making up losses each month to stay at the same amount. (For example, I would adjust the number of shares at the beginning of each month to have a value of $10,000). In that way, I would avoid the reverse compounding issues that might prevent you from rapidly recovering losses in the event of a spike in the vix</p>
<p>I have also given some thought to the question of why the leap puts might be persistently mispriced. Correct me if I am wrong, but I think that generally at the money puts and calls have to be about the same price in order to avoid people profiting by simply selling the puts and buying the calls. That works fine with respect to ordinary securities that have more or less equal probabilities of going up or down. The difficulty with vxx is that it is designed to go down most of the time, so in order to keep the puts and calls at equal prices, the call will be necessarily be overvalued and the put undervalued. You can correct for some of this through the bid ask spread, but you can’t get all of it when the difference in the likelihood of going up or down is so dramatic.</p>
<p>Does that make sense?</p>
<p>Yes…
I can think of a few reasons why the puts might be mispriced.</p>
<p>Do you know what a conversion or reversal is? </p>
<p>Do you know that if I buy puts and sell calls of the same strike price and expiration, that is the same as selling the stock? Do you know this?</p>
<p>Oh yeah, I left out the fact that if at the money puts are priced higher than calls, the trader would have to short the stock in order to automatically benefit, right? Or am I confused about something?</p>
<p>I’m not sure what a conversion or reversal is in this context.</p>
<p>Yes… That is a reversal. You would have no risk of movement in the stock. You would be delta neutral. </p>
<p>So… Let’s say the stock is 20. Those leap 20 strike price calls were 5.00. The puts were 6.00 because of the contango. I could buy the calls for 5 and sell the puts for 6. I would get a 1 dollar credit. A dollar credit from the $20 strike price is $19. I just bought the stock at 19. The stock is trading $20. I sell at $20. I paid $19. I make $1.00 everytime I do this. I d have to be able to borrow the stock. The reversal keeps the options in line with the stock price.</p>
<p>So because the reversal market keeps the options in line with the stock price and they shouldn’t be in line because of contango…you can get mispriced option prices. The puts could be too low </p>
<p>Another reason the puts can look too low is traders are pricing in a rise in the Vix or changes in the contango over the life of the options. </p>
<p>Another reason the puts can be too low is traders don’t understand the
trade.</p>
<p>Or maybe the puts aren’t too low …</p>
<p>I would think options are hard to price in these Vix etfs…</p>
<p>A conversion would be buying the stock, buying the puts and selling the calls of the same strike price and expiration.</p>
<p>You would be delta neutral.</p>
<p>Interest rates and dividends affect the pricing of reversals and conversions. Interest rates are near zero and many issues don’t have dividends so I just saying this for accuracy.</p>
<p>I appreciate the info, and your patience with an amateur.</p>
<p>No problem. </p>
<p>One more issue is with wide markets between the bid and offers in options. Let’s say the stock is 20 and the leap put is 4.50 bid 5.50 offer. You buy the put for 5.50. The stock drops to 18.25. You were right. The stock dropped 9 percent. That put will be bid around 5.50 bid. The stock goes your way. 9 percent your way. That is a pretty good move. And you made nothing. That is before any time decay too.</p>
<p>I always try to look at negative outcomes before I trade. Sometimes I think I have the negative outcomes covered and I put on the trade and in the middle of the trade I realize I screwed up. I hate when that happens. Lol</p>
<p>This put trade can work. This vxx has dropped a lot more than 25 percent in a year. A lot more. If the Vxx puts can make money even if there is a pop in the Vix to 20…that is pretty good.</p>
<p>Most of us learn more by doing. You don’t have to commit 10,000 to a trade if it makes you nervous. You can buy 1 put.</p>
<p>After listening to you and thinking more, I think that I’ve decided to go with the idea of keeping a fixed amount in xiv each month, taking profits or replenishing the position based on the movement of the etf and reevaluating the amount each year. I’m very confident that this strategy will be quite profitable over the intermediate and long term and while I’m pretty confident that the leap put position would be even more profitable over the long run, I am uneasy enough about state of my knowledge that I think that I am better off (emotionally if for no other reason) sticking with holding the etf directly.</p>
<p>Thanks again for the useful discussion.</p>
<p>Not having followed this discussion, I’m curious why you would buy the xiv when vxx is at an all time low and the market is at an all time high?</p>
<p>Is there anyway the average investor can follow fund flow? I know IBD refers to this a lot but they don’t say how they identify when funds flow in and out of a stock.</p>
<p>I deleted that post. Wrong link.</p>
<p>EMM1, you are welcome.</p>
<p>Good luck. </p>
<p>You keep us posted.</p>
<p>So what are some nifty trading ideas for this week?</p>
<p>Sorry, Doc, I was out of touch for awhile.</p>
<p>The idea is to take advantage of the persistent contango in the vix futures, which result in consistent losses in vxx. While taking your point about the current level of the vix itself, there are periods (for example, the period from 2005-2007) where the vix stayed down for significant periods of time. I have no doubt that a spike will come eventually, but am trying to harvest the gains from the contango until the spike comes. When the spike comes, I will no doubt suffer some losses. But by remaining committed to holding a fixed dollar amount of xiv, history tells me that I will be able to recover those losses in a relatively short period of time and resume harvesting the gains from the contango.</p>
<p>I hope that was in English.</p>
<p>Its just my guess but I would say that spike is coming sooner than later</p>
<p>EMM1, I think that is a great explanation.</p>
<p>Resold some aapl 410 puts that expire this week…</p>
<p>Sold tsla 36 puts that expire this week…</p>
<p>What’s going on with aapl - I was going to sell 4/5 420’s which is support but the floor on this is just dropping out</p>