Specifically, shorting TVIX and hedging against a sharp large drawdown with long VXX Far OTM calls. I usually keep about 70 percent of this account in cash. Some I hear do 80 percent cash and lighten up on the hedges. But what I was wondering was how to utilize the Kelly formula to this kind of position. When do I rebalance? How large of a loss should I allow -- if I do accept drawdowns up to a point. Is Kelly relevant here? Seems like a modified trend following strategy to me, so maybe not. Thoughts? Thanks in advance.
I suggest that you very carefully consider your risk in the event of Black Swan cyber attack/market meltdown. Such an event, which is within the realm of possibilities, could set you back many years. TVIX, UVXY, etc. can be very ugly animals. If you have a system that profits from TVIX, there are better ways to limit and define risk.
If I am, say, short 100 shares and long a protective call, my risk is capped at the distance between the stock and the strike, no? I've found that my bigger worry, on a practical level, is when a broker increases margin on certain shorts to over 100 percent or they just buy back my short if the market gets too hot for them.
Sell TVIX every single day. More on up days. Sized appropriately, this will do very well over time. Sized inappropriately or otherwise uncontrolled, you'll blow up.
I do some LEAP puts on UVXY and if the sponsor hadn't changed it from 2X to 1.5X I'd be winning right now on my Jan 2020s. I am winning on my 2021s and I think the 2022s list today, actually, although I'll wait for a better entry I think. Just a FYI: I sell shortterm far OTM calls to bring my basis down on this trade, too. I think if entered appropriately and the sponsor doesn't screw you, it can be a nice safe trade, and can even be done in an IRA.
I can't sleep with just position sizing and a large cash position on a short UVXY, TVIX or even VXX trade. I need at least a 50 percent black swan hedge with some OTM calls, although I am thinking about using VIX calls instead of calls on the underlying. Thoughts?