SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.


Welcome To PureVolatility

Recommended Posts

PureVolatility Portfolio

Trading Instruments

VXX & UVXY for Collar, UVXY for standalone long puts

Position Types

Collar, Long Puts

Strategy Description

We will be looking to hold constant exposure to short volatility while the curve is in Contango in an effort to harvest volatility premium.  We will also look to go long volatility when the curve is in significant Backwardation and indicators reveal the trend will continue in the short term.  Because the curve is in Contango approximately 80% of the time, we will hold short exposure to volatility the majority of the time.  The main strategy to gain this exposure will be through an option only Collar spread.  For those not familiar with the Collar strategy please read this article (in our trade the shares are replaced by a deep in the money option).  We use an inverted Collar on VXX.

The PureVolatility model portfolio will be based on total capital amount of $10,000 with between a 5% and 10% allocation on risk.  This is very important as those who are trading in a Reg-T account would on average need $10,000 in initial margin to hold the position even though the risk may only be $500.  Portfolio Margin accounts would only require the $500 max loss amount.  Reg-T is somewhat antiquated when it comes to margin for a Collar spread.  However, this really should not be an issue because if one does not have $10,000 to put aside for this strategy it is probably not appropriate.  Furthermore, the increased margin amount will keep members from over allocating to this very aggressive strategy.  We will target a risk reward of better than 1:1 for a two week holding period. 

Here is an example of the Collar strategy on VXX with the underlying at 38.28:

Long 1 VXX 100 put @ 61.30(expiring approximately 45 days out)

Long 1 VXX 40 Call (expiring three weeks out)

Short 1 VXX 35 Put (expiring two weeks out)


The objective of the trade is to have VXX decline as a result of Contango in the VIX futures curve.  (To learn more about Contango please review this article by Vance Harwood).  Of course the VIX futures complex is an extremely volatile space, therefore we will not always see a smooth drift lower.  This is the reason we hedge the trade with the long call and short put.  The long call protects us to the upside by limiting losses and ultimately even makes the entire trade profitable with a large volatility spike.  To see how this played out in real time please review Kim’s article The Incredible Winning Trade In SVXY.  The short put provides us premium in the event VXX does not move down to our short strike. 

Selection of strikes and dates are very important and will change based upon VXX IV and the level of Contango in the futures curve.  This is not rules based but rather discretionary.  The objective is to close the short put a few days before expiration which will have the long call about ten days away from expiration.  At this time both the long call and short put will be rolled out.  This process is continued until the long call matches the expiration of the long put at which time the trade will be closed.  The trade is flexible and allows for adjustments in the event that VXX moves against our position.  These again are not rules based but rather discretionary.  In large volatility spikes the trade will typically be closed and replaced by a straight long put on UVXY as more of a volatility mean reversion play.  Here is a risk graph of the Collar position at initiation:



Share this post

Link to post
Share on other sites
This topic is now closed to further replies.

  • Recently Browsing   0 members

    No registered users viewing this page.