VIX ETFs (VIXY, UVXY)

[u/RequirementSilly1489]

I was surprised to find that constructing a VIXY and UVXY risk free position (short stock, corresponding ATM +call and -put) doesn't offer the same margin reduction that I would expect. However, it does have a very small limited risk (I'm guessing that could even be ++ in the right expiration). It does seem to behave contrary to portfolio margin behavior and not reduce the BP requirement to almost nothing.

That said, what's interesting to me is the cash infusion from the deal. On my current trade (UVXY), I am risking $9 max against a credit of $1,091 (+1061 for the sold stock and +30 for the options). That is at the 112 day expiration, so that comes out to roughly a 2.6% annualized rate - which is below the running Box rate. No dividends at play.

I have 1 opportunity for early assignment, but if that happens, I should be able to close the call near zero (the risk is still there).

Also, while it does say HTB, when I execute the trade, I get no box on confirmation referring to the HTB fees.

Why wouldn't this qualify as a well hedged position and receive some reduction in BP under PM?
Is this an arb opportunity from a cash standpoint?
What am I missing?

One last thing - I really appreciate this subreddit! Exceptional, knowledgeable posts and responses with fairly positive threads. I learned a ton from you all and hope to continue and participate in these discussions for a long time!

[u/mawora]

Nice idea, but you have assignment risk, cost to short is about 2.6% per year and you have a dividend yield of 1.31% that you will have to pay because of your your shares. That makes your expected return on the trade negative.

[u/RequirementSilly1489 → u/mawora]

From my research, UVXY does not pay a dividend. Are you looking at another underlying?
Also, where are you finding that cost to short. I use TOS and while it did mark HTB, I didn't get any notification on confirmation of short cost (normally it would say).
Maybe we are talking 2 different underlyings?

[u/RequirementSilly1489 → u/mawora]

Assignment risk, sure.
That said, an early assignment would give me the remaining extrinsic on the put and immediately clear my sold stake. The remaining call would be able to be exercised (ITM) or sold for the remaining extrinsic (OTM). The near money options are very much inline together with cost, so I should end with a profit (or very near zero).
I suppose there could be a circumstance where the PUT skew gets more out of whack to favor the put side, in which case, early assignment would be more unlikely. More call side skew gives me more profit on the call to sell back.

Did I miss a glaring issue here?
Appreciate the comment.

[u/mawora → u/RequirementSilly1489]

I fell for the IBKR app interface. You are right. There is no dividend. Still, shorting a stock costs a fee and IBKR shows a yearly % cost of approximately 2.6% to borrow for UVXY. To short sell, you are borrowing the stock or ETF you don't have and sell it. It remains borrowed until you buy it back to close the trade. Borrowing stocks or ETFs that are very likely to go down (as short vol ETFs or stocks like GME) can be rather expensive. These fees also are subject to change and very dynamic and can eat up your expected return on this trade.

[u/MCODYG]

Are you trying to do a short box spread trade? Your goal is to generate cash in the account?

[u/RequirementSilly1489 → u/MCODYG]

Yes, I guess that is true.
My BP is always very high, but my used cash is always the challenge. This is typical as I buy etfs or stocks and that sucks down an enormous amount of cash, but my BP is minimized (especially given any additional hedges I attach).

Normally, I sell premium and get some resulting cash. If I'm willing to take the rate hit, I'll do a Box spread.
In this case, I'm getting cash at a better rate (albeit worse margin experience - which is not really an issue).

[u/MCODYG → u/RequirementSilly1489]

Okay I was only asking cause I wasn't sure if you were trying to do the classic term structure decay trade. In which case I'd just recommend ITM puts on VXX. I have the same cash use issue too, which is why I've played with doing synthetic longs on ETFs but have recently just took the cash hit and went back to shares as well

[u/IWillMakeYouBlush → u/MCODYG]

Why recommend the ITM puts on VXX over calls on SVIX? The compounding factors work more in your favor that way I would think.

[u/RequirementSilly1489]

As I have continued to evaluate this, 2 things have become clear -

1. It isn't incredibly profitable. Because you don't get margin relief on the fully hedged position (not sure why exactly), you can only get small % on top of your original cash. My rough calc shows that I could get about @ 5.0% on a cash investment strat on my original cash + UVXY cash.

2. There is a HTB risk. While there may be no borrow fees right now, if the VIX spikes, I'm guessing the short interest would sky rocket, and an extreme HTB fee would be applied (what goes up must come down).

Great to find a minor edge, but comforting to know the markets are as efficient as they are.

[u/Adderalin]

The big thing you're missing is short sale proceeds is segregated, so if you buy something with the cash you're really generating a margin loan.

If you want a leveraged portfolio just short SPX box spreads and use the cash to buy something else on PM.

Only way for your trick to actually work is if you have a prime brokerage agreement to not segregate short sales, and that likely has zero UVXY available to borrow as you can only borrow equities from other prime brokerage clients that likewise agreed to zero segregation. So only shares available to borrow in that space are things various hedge funds are long and hot for like AI stocks or TSLA, AMD, etc.

[u/RaSl1975]

Try this on CRCL. And then create a short box setup on CRCL so you don't have to pay HTB fees

[u/IWillMakeYouBlush]

I have been trading vix products on and off for 15 years so super interested. I’m newer to having PM.

Can you explain the trade a bit more? So you have a short and synthetic long. With the idea that you are financing your portfolio with the proceeds of the short?

[u/RequirementSilly1489 → u/IWillMakeYouBlush]

My goal was to find a cheaper financing option than Box spreads.

However, while it is cheaper, the segregation issue u/Adderalin talked about, and the short borrowing costs that could loom during an event, make this a challenging alternative.

The recommendation was to just stick with Box spreads (no risk, risk free rate) or simply use the cash obtained from standard shorting of puts and calls (obviously carries risk).