Hedging with UVXY Calls, Weekly Wrap 1/14-20/2018

Macro and Markets

While most people are celebrating yet another week of records in the stock market, I’m increasingly concerned with the short-term froth. “There is now almost $4 in long funds for every $1 in inverse funds, a record exposure level.” reports SentimenTrader.

The ProShares Ultra BIX Short-Term Futures ETF ($UVXY) has been called the worst instrument devised by men due to its continuous erosion of value from the VIX term structure (contango). But it works fine as a short-term hedging instrument since every time the S&P dips the volatility jumps and it spikes higher.

On Friday, I picked up some $UVXY calls. This is part of a new VIX related strategy I’m exploring this year — seeing that crypto is no longer a profit center. This particular play is based on sentiment measures, not the US government shut down, although the latter may provide an excuse for the market to correct. Speaking of which, I was at lunch with a group of colleagues last week, one of them remarked it was like “the mother-in-law threatening to leave” which brought a chuckle.

As discussed in the previous post, a quick pull-back (3%? one can only hope for so much in this environment) is definitely healthy at this point, and may even be necessary for the durability of this bull market. This trade with $UVXY calls was meant as an experiment since the size was tiny compared with my total exposure.

Cryptocurrencies

I thought I wasn’t going to write about cryptos for a while but the issue with Tether got me riled up. I provided links to two Reddit threads in the previous post. Also check out Tether’s marketcap from CoinMarketCap and see the jump after April’17. This link shows $100 million worth have been created for each of the last six days (as well as the millions before). I’ll let the readers draw their own conclusions.

Portfolio

Other transactions include selling some puts in Diageo ($DEO), and swapping $JNUG for $LABU for my 3X leveraged ETF trade. I finally caught a 25% run in $LABU after everything $XBI related gave me nothing but pain.

Current portfolio composition is as follows: PMs 11.0%; equities 52.6%; FI, 23.1%; cash equivalent, 5.9%; and other, 7.3%. The “other” category is composed of 3X ETFs, 0.4% and options, 6.9%. Effective exposure from options is 85.2% of total portfolio value for a leverage ratio of 12.3X. The portfolio is 138% long equities (not beta-adjusted). Options value and effective exposure both increased along with that of the underlying. Gamma remains positive. Options had and will continue to have outsized returns as long as this bull market continues.

YTD the active account is up 12.26% and the total portfolio 8.43%, vs. 5.08% for SPY and 2.63% for 60/40.

Good Reads

None of the above is investment advice, the standard disclaimer applies.