UVXY Swing Long Strategy

Volatility price distribution is skewed. That is to say that the possible distribution of future prices is skewed to the upside, and there is "theoretically" a limit on how low volatility can go.

This doesn't just mean go long VIX futures, or go long VXX/UVXY because there is a downward drag if you go long these products over a decent length of time. The price naturally goes down, which is very apparent when you look at a longer term chart of VXX or UVXY. For chart purposes this makes it difficult to assess levels, so you have to look at the charts of the VIX index.

Looking at the VIX chart over the past 3 years you can see it has been relatively range bound, and fading moves around the 12 level has been a net profitable "trade idea". Again, because of the downward drag it isn't as simple of just going long volatility products. On net volatility hasn't changed over the past 3 years but clearly UVXY has been completely destroyed. While the 3 year chart looks horrible, the 1 year chart illustrates the validity of any long strategy.
3 Year VIX Index:

3 Year UVXY Chart:

1 Year VIX Index:

1 Year UVXY Chart:

Over the past 52 weeks volatility hasn't changed too much while UVXY has lost a whooping $160, or 80%.

The Strategy:

(1) Decide on a maximum position size. This is important because you want to be able to scale in over time and price. The maximum position size should be something you are prepared to take a reasonable drawdown on, thus shouldn't be enormous with respect to account size.

(2) Decide on a VIX range that you would like to trade on. As mentioned there has been an edge in fading moves on the VIX towards the 12 level, so that is a good starting point. You should be prepared to scale in over price, so there should be a range you identify. For example, I will scale in over the range 10-12 on the VIX.

(3) Sell weekly puts on the UVXY over the range. This is especially important because selling the puts ensures you get the appropriate scaling in over price, but it also helps improve your average cost by receiving a little credit. For example at the current VIX of 12 and UVXY of 40 you should sell UVXY weekly puts ranging from strike prices of 30-40. It may be necessary to go out a week or two to get the strike prices needed for all.

(4) Repeat this each week and you will begin to get filled on your UVXY shares. Adjust the strike prices you are selling puts at each week for the downward drag.

(5) As you get filled on your UVXY shares (via the puts) sell calls against the position. You want to spread the strike prices out to ensure that if there is a rally in the VIX you have a nice balance between credit received and capturing the rally in volatility. NOTE: Do not sell naked calls on UVXY this could potentially be a devastating move for your account because of the pricing skew of volatility. There is enormous tail risk to the upside in volatility.
Again, selling these calls will improve your average cost on UVXY and put you in a nice position of protecting against the downward drag.

(6) As you get closer to your maximum position size you want to be more aggressive with the strike price chosen for your short calls. The idea is you may get executed on some of your short calls on mini price oscillations, which will in turn allow you to buy back lower again (by selling puts), again improving average further.

(7) While your average is quite poor you also want to be aggressive with selling calls. And this is likely to be the case for most of the trade. However, as your average gets better spread out your short calls a little more; perhaps even moving out the duration to one month for a little bit. By moving out the duration you should be able to go a lot wider on your short strike (for example with UVXY currently around $40 you can sell a 38 day $60 strike for around $2-$4). Obviously if you got executed on that you would be rather happy!

(8) On net you are likely to be fighting the current for a large portion of this trade; which is part of the reason it is very important to look after your average. However, when the trade finally works it will happen very quickly and probably work out within a couple of days. Hopefully, when the time finally comes for the VIX to move upward you are in the wider strike price part of the trade and haven't capped upside too much by trying to look after average.

(9) A note about rolling the calls. You want to be aiming to improve your average by roughly 2.5% each week (which in this case with UVXY at 40ish equates to about $1 per share). A decent amount of edge can be lost if there is an inefficiency with rolling the calls (i.e. market moves while attempting to roll the calls). So the way to do it is to have a GTC order in to cover the calls at around 20c (which is an amount you obviously aren't too worried about when you consider that you're receiving about $1 per call each week), then when the order is filled to cover the call at 20c offer out the next one immediately and be aggressive to get fill (i.e. roughly enter at slightly worse than mid point) - you do not want to market to move while you are waiting for a fill.

EDIT: This system is still in the experimentation stage but it appears that a good way to ensure that some of the position is held for a decent part of the vix move is to sell weekly calls, one close and one far away (the improving average part of the game) and as the vix moves higher there is a decent chance you won't have been executed on the further away call (because it's only a week expiration), so when it expires and the vix is higher you take the opportunity to sell much further OTM calls with quite a wide duration.

EDIT (2): When aggressively trying to improve average by writing calls, having some short puts there to ensure you make money even if UVXY goes up can be a good idea. Just be careful not to over expose account of course.