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ProShares Ultra VIX Short-Term Futures Message Board

  • xtradersdotnet xtradersdotnet Aug 3, 2012 7:21 PM Flag

    writing covered calls to bring cost basis down is this good?

    I dont hardly use covered call writing but i bought this when it was at 7.20 so today i wrote the sept 9's for .65

    so now my cost basis is down to 6.55 by the time september o/o comes around

    with UVXY still below that evenright now , if it goes to say 5.00 in sept then i will write more calls to bring down the basis even more say i write the calls at the same type of premium of that would be say .40 now my cost baises is 6.15 ect...

    sooner or later if you keep doing this doesnt your cost basis get to 0? or low enough that you will soon be at or below the current price, then at that point sell the stock at the next bounce?

    anouther words if you are in a losing postion can you just keep writing calls until you bring your basis so low that you will actually make $$ even if the stock does go down as your cost basis can be 0 and you still write calls?

    i know this suffers from contango most of the time but my thought is i dont want to sell and take a loss only to see it go up again, i dont need this money for a long time so why not just let it sit writing calls on it until it gets to be a break even or even make me money.

    I know that can take a while but would it work? the logic say yes

    am i right?

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    • xtra

      the idea is sound. I would have sold the Aug 7s at that time. For example if you bouht at the close Friday for 6 bucks you could have sold the Aug. 6s for .65. If it stays about 6 you make over 10% in two weeks. Also if it falls (which is all it seems to do) your basis is 5.35. this is how I do it. Problem is when you get that big spike and the VIX doubles you miss out on the big upside. II just can't take the pain so I sell the current month near ot at the money stikes.

      As another poster pointed out the VIX is so low that selling the at the money migh not be the best move at this time. I am in at 7.26 with the Aug 7s for .95. Looks like I will be selling some 6s in to weeks

      • 1 Reply to richard_rapp
      • the issue you have to address is

        "Will the option premium I recieve be less than the drop in the ETF price one month longer"

        If the answer is yes, then you are increasing your losses.

        If the naswer is no, then it is a good policy.

        As I mentioned, it all depends upon how high the spot VIX will be when a decision needs to be made versus your loss at that date.

        Best of luck.

    • I write covered calls on stocks and tried it on this ETF and lost a bunch of money.

      Why? Because, long term this ETF will decay each month faster than any option premium you receive.

      Typical case:

      Without writing the call
      cost basis $7.20-market value $6= 1.20 loss

      Now let's assume different prices in Sept

      Price of $7

      Cost basis $7.20-.65 option-7 ETF= profit 0.45

      Price of 6

      Cost basis $7.20-.65 option-$6 ETF=loss of 0.55

      Price of 5

      Cost basis $7.20-.65 option-$5 ETF= loss of $1.55

      Price of 4

      Cost basis of $7.20- .65 option- $4 ETF= $2.55 loss

      Now, what do you think this ETF will be worth in 1 1/2 months?

      This will guide your decision.

      Remember, you are fighting against contango as if we get no change in spot VIX in 1 1/2 months, then Sept future VIX of $19.36 will drop to $15.69 or a 19% drop (or $4.86 based on todays price).

      The one good thing you have going for you, is that spot VIX is so low that it may not drop any lower in a month and a half, and you always have a chance that it will be higher.

      Good luck

    • By the way, never catch a falling knife.

    • What happens if they suspend trading on this POS?

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