As a habitual naked Call contract writer in UVXY, I am often asked how I did during the covid market correction in March 2020. I survived, and even profited, here’s the story.
My naked Call selling strategy and defending mechanic began during the summer of 2019, and the first test came that December. A Trump tweet about the China tariff situation sent the markets reeling and volatility spiking. This was my first defense since deploying the new strategy. I remember it clearly as I was driving through Libby, MT and had to buy and sell UVXY shares on the road from my phone. That spike was short lived as I expected and easily navigated (the market had had many China tariff spookings and was getting a bit tired of them) I had even managed to pull my shares off at a higher price than I bought them so I actually profited from my defense.
Later that month I was in Florida and sat down for an interview with Seth Golden where I explained that defense event along with my general strategy and history of trading. That successful defense prepared me for what was to come.
As the covid uncertainly started to build I was still executing my normal Call selling strategy into late February. I was carrying short 10.50 Calls that had been already been rolled once for a break even at around $11.60 (I have since lost the actual play by play but remember the milestones) My ‘Defending Line’ was set at $12.25 which was hit the week of February 24th. Shares were purchased there to cover the Calls and to prevent further damage. I rolled the $10.50 Calls out a week to collect that premium, raising my B/E another .25 or so. The following week UVXY rose past $30 so the next roll only added another .10 to .15. Still below my B/E and with UVXY looking like it would not stop, my final roll was up and out to 2 weeks later and the $25 strike. This was risky because if the event ended and a volatility crush ensued, I had locked in that loss between 10.50 and 25. But the result of that roll took my B/E to $12.31 leaving me with a .06 profit. I then just took the assignment of the $25 Calls which took away the shares, leaving me all cash and without a loss. Yes it was almost 2 months’ worth of no profits, but I certainly didn’t blow up. This is still the main defense strategy I use today.
What even happened?
UVXY went from an all time low of $10.40 to a peak at $135. That move is romanticized among long players and often cited as a future potential. While a move of that magnitude is always possible, let’s look at what that required to produce.
SPX dropped from $3393 to $2192, a drop of over 35%. Drops of 30% or higher from a peak have happened about once per decade since WWII. It also took approximately 5 weeks for that drop to occur. If that drop happened faster, UVXY could have gone higher. If that size drop took a year instead of a little over a month, UVXY would not have gone anywhere near that high (as the SPX bear market of 2022 illustrates)
The VIX index also began at a relatively low level, with a low of 11.75 in January and still below 15 before the market took off. If SPX were to drop 35% from a VIX at 25, the impact on UVXY would be reduced.