Revisiting the SVXY strategy (and why I like SVXY over VXX)

In October 2014 as the Market plunged, I devised a strategy to make money buying SVXY call options. To get up to speed, read part 1 and part 2.

I also recommend checking out DRT trading …I just found this site today and it is perhaps one of the best websites on index option trading strategies, with thousands of backtests.

One reason why I like going long SVXY over shorting VXX is because you don’t lose all your investment if you’re wrong. Buying VXX puts or shorting VXX can cause a total loss – or even more if you’re short – but buying SVXY may only entail a 50% loss at worse. It’s seldom worse than that. Second, gains going long SVXY (and its cousin XIV) can be much bigger and faster than shorting VXX.

For example, if VXX is at $30 and you’re short $10,000 worth of VXX (about 333 shares) and the price plunges to $15, you’ve made $5k. But if you’re long $10k SVXY, SVXY will double (corresponding to VXX falling in half) and you will have $10k potential profit, which is obviously better. One way to get around this is to keep adding to your VXX short on the way down, but it requires some calculations to figure out how much VXX add at fixed price intervals, which I’m too lazy to do right now. But in a rapidly moving market with gaps, adding to your short may not be feasible.

As for my strategy, SVXY nearly doubled since October 2014, but it has singe plunged 50% from $98 to $49. The VIX spiked as high as 53 and has since fallen back to 25.

(click to enlarge)

As I discuss in part 2, the log property of volatility is kicking in, meaning that subsequent price declines in SPX/SPY aren’t causing big spikes in volatility. The market could make new lows, but the VIX won’t hit $53 again unless there is another 2008. That means it’s time to buy SVXY on the dip, since SVXY seems to be impervious to future price declines provided SPX doesn’t fall too much too quickly.

If you have a $30k account, I would recommend putting $15k (50%) in SVXY at $47 (closing price as of 9/9/2015), as per my strategy. When it doubles take some profit (which will be updated in a future post when that happens).

For $15,000, buy 3 deep-in-the-money $25 Jan 2016 SVXY calls for $22 apiece, $6600 total. The delta is .91, which is very close to owning the shares outright. What’s great about deep-in-the-money is you are effectively buying SVXY at half price while capturing all the upside, save $450 of extrinsic value. As shown in yellow, the $25 Jan 2016 SVXY calls:

If SVXY keeps falling, defer to part 2.