Close the ProShares Short VIX Short-Term Futures ETF (SVXY) Bear Call Spread Trade

By on January 19, 2017

It’s time to close our January 2017 bear call spread on the ProShares Short VIX Short-Term Futures ETF (SVXY).

Action to Take:

Buy to Close the January 2017 $105/$110 bear call spread on the ProShares Short VIX Short-Term Futures ETF (SVXY) for a net debit of $2.90 or less.

The Volatility Index (VIX) has jumped as I expected. Since Tuesday, it has increased about 12%. However, SVXY (which is a way of going “short” volatility) simply hasn’t cooperated. In normal market conditions, an increase in the VIX results in a corresponding drop in SVXY, which has been overextended since the beginning of January.

While I still believe a pullback in SVXY is overdue, we will close out our position today in order to avoid an assignment of SVXY shares on expiration. You see, as our short options (the $105 calls) are in the money, holding them through expiration would result in being “assigned” a short position in SVXY. We don’t want that to happen, so I recommend closing out the position today.

As a reminder, when closing out the credit spread, use the midpoint of the “bid” and “ask” of the option as a guide to set your limit price to close the position. It is also recommended that you close this position today, so make sure that your order gets filled.

If your order to close out your credit spread doesn’t get filled within the first five minutes, modify your order with a new net debit limit price somewhere between the midpoint and the “ask” price for the credit spread. The closer you are to the ask, the more likely the order will get filled.

But please keep in mind that the midpoint may fluctuate from the time that we publish the alert to the time that you are able to read it and take action. Therefore, please set your net debit limit price based on current midpoints at the time of the trade.

Assuming a net debit of $2.90 to close out the position, we’ll take a loss of 49% on the capital at risk for this trade.

Now, in the event that you miss the window to exit the trade today and you get assigned the short position, there are two choices to close out the position:

  1. You can simply buy back the shares in SVXY when the short position is assigned to you and close out the position. When you are assigned a short position, you will see a negative number of shares in your account indicating your short position… for example, “-100.” The number of actual shares will depend on how many credit spreads you sold. You can place a limit order to buy back those shares to close the position.
  2. You can maintain the short position for a few more days to see if our trade thesis plays out. If volatility increases enough, SVXY should drop from current levels. If SVXY drops below $105, you can buy back the shares and make a profit… closing out the position below the short option strike price ($105). I don’t recommend holding the short position for more than a week, though. It is usually better to close out the trade within a week and move on to our next opportunities.