Twenty minutes later I closed out SPY at 108.11, S104 puts at .08, and bought back my calls at 1.62 for a net credit of  106.57,  a net profit of 0.41 per share.     With almost half the available profit available that quickly I couldn’t justify holding onto the position.

SPY 31-Aug and 1st of Sept 2010

XXV booked its first million share day on its 15th day of trading—August 6th, and average volumes have been running over 400k.  You have to imagine that Barcalys is happy with this new product.

XXV actual performance vs theoretical percent move or true short, click to enlarge

Livevol shows the 27-Aug 106 IV’s at 28 and the 18-Sept monthly IV for the 106 calls at 24.  Right now, Livevol’s IV numbers are the only ones I believe for the CBOE Weeklys options.

Usually getting the prospectus for a new ETF or ETN takes a Google search and a couple minutes of browsing.  The prospectus for Barclays’ new XXV inverse volatility ETN proved to be a much more elusive search—it didn’t show up in the top 20 hits.   Reading through the fine print of the XXV Fact Sheet provided this pointer for web access:

Before you invest, you should read the prospectus, prospectus supplement, pricing supplement and other documents Barclays Bank PLC has filed with the SEC for more complete information about Barclays Bank PLC and this offering. You may get these documents for free by visiting EDGAR on the SEC website at www.sec.gov.

Even finding the prospectus on EDGAR proved to be frustrating.  My search in Edgar’s company search for  ”Barclays Bank PLC”  resulted in a  lot of hits, but 20 minutes of clicking did not yield anything XXV related.    I finally did an  EDGAR text advanced search with XXV as the text and Barclays Bank PLC as the company to find the XXV prospectus and a few other related documents.

I have only started to dig through this 66 page document, but so far the most interesting aspect of XXV is its “Automatic Termination Event”—which liquidates your position if the intraday indicative note drops to $10 or less.   I don’t know of any other ETN or ETF that includes a built in stop loss order like this.   XXV is effectively a short of VXX, and as investment writers are fond of reminding us, a short position can theoretically result in “infinite” losses.  The people at Barclays have decided to block the infinite losses scenario  by limiting an investor’s potential maximum loss to be whatever they invested minus around $10 per share.

Somewhat sobering, the prospectus finishes the section on Automatic Termination Event with:  ”If the historical frequency of precipitous increases in market volatility persists, it is highly likely that an automatic termination event will occur”.

This is probably not an investment that you want to buy and hold…

Recently I had deep in the money puts and OTM covered calls on SPY in my IRA account.   As expiration approached I begin to wonder what would happen if I didn’t sell my puts.  If the options were cash settled, like VIX index options, then there would be no question,  the value of the puts at expiration would just be credited to my account.   But since SPY options are physically settled you would normally expect an expiring  ITM put to trigger a short sale of the underlying at the equivalent of the strike price.   Except in an IRA account you can’t sell short.

I spoke with someone at the Fidelity active trader helpdesk, and they said that if you didn’t have the appropriate amount of underlying in your account at assignment, then they would indeed create a short position in your IRA account.   The next step (and I got the feeling there was a pretty short fuse on this) would be to contact you and ask/tell you to close out the short position.   If they aren’t able to contact you , then they would cover the short position by buying the underlying in your account.   Between the time of the assignment and the cover you would be exposed to the market moves of the underlying.    Through this scenario I don’t see how a “free riding” violation could occur, but with long ITM calls I think there is some potential to trigger a violation.

In my situation, my long position in the underlying would cancel out the short sale, so I could let the puts expire, gather the last of the premium on the puts  (my short calls were so far out of the money there was no chance they would be exercised), and comfortably reside in cash over the weekend.

Otherwise, if you aren’t going to be long the underlying at assignment, it looks like a good idea to sell those ITM puts before they expire.

Last Monday, August 9th I felt there was a higher than normal risk of a market pullback,  but there was still the opportunity for making some good profits on the weekly options. Some downside protection seemed like a good idea, and the OTM 111 puts were attractively priced at 0.35.    Late on the 9th  I bought  SPY at 113.01, sold-to-open 13-Aug 113 calls at 0.90, and bought  13-Aug 111 puts 0.35.   Maximum profit on this trade was 0.55 per share, and worst case loss was  1.46.   I had given up 39% of the profit to decrease the downside risk from essentially the entire value of the underlying to 1.46 per share.   Since there was only 4 days left on this trade the remaining  0.48% profit potential was still attractive.

The market dropped off sharply on the 10th.  In cases like this I will often buy back the calls.   If  I think the market is going to keep going down I’ll then sell ATM calls to harvest more premium, or if I think there will be a bounce back  I’ll wait to re-sell the calls, hoping to sell them again at a higher price than I just bought them back at.   In this case I bought back the 13-Aug 113 calls at .53, and later in the day resold them for .79 when the market did rebound a bit.

Wednesday the market really blew off.  I bought back my 13-Aug 113 calls at  0.12 and quickly sold 13-Aug 111 calls at 0.61 which I bought back later in day for 0.39.

Thursday I sold 13-Aug 110 calls at 0.22 and bought them back later at 0.13

Friday I closed out the position early because I was not going to be able to monitor the position the rest of the day, selling the SPY at 108.61 (down 4.40 per share)  and selling the 13-Aug 111 puts at 2.22 (up 1.87 per share)– I left about 0.2 on the table with the puts because I didn’t wait until near close to sell them.

In spite of all my call maneuvererings (which were all profitable)  I was still down 1.18 per share, compared to the worst case loss of 1.46 from just holding the position.   If I had not purchased  the puts I would have been down 3.5 per share,  almost triple the loss I ended up with.

Well, I was clearly wrong about people not being in panicky mood.   Around 10:30 EST the market decided to take another leg down and the VIX did spike up quite a bit.   Later in the day the market rallied back to around the point I created this position.    I bailed out of my position less than an hour after I created it, before the leg down,  because I didn’t like the way the market was acting. Took a net profit of 0.26 per share and was glad to have it when the market tanked a few minutes later.

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This morning’s job report, while worse than predicted, was hardly evidence for Armageddon so I think the early market blow off is probably most of the action for the day.  The relatively small blip in VIX confirms that people are not in a panicky mood–besides, who wants to panic on an August Friday?

I like creating covered call positions when the underlying is right at the strike price.  The ATM calls have their maximum premium at that point, an underlying move in either direction decreases the premium.   I bought SPY at 112.01 and sold 112 strike calls (weekly options expiring today) at 0.50.   Break even is 111.51, and the best case profit is 0.49  (.43%).

The gamma certainly is high on expiration day.  SPY is now at 112.45 and the 112 option premium is down to 0.20.