Friday, March 1, 2013

Covered Short Put in VXX

Reading Jason's post about how he is trading his position in the /ES along with the segment that I caught the tail end of this morning on got me thinking about a short position in volatility via the VXX. Being that both VXX and options are a decaying asset I just love the idea of this. With that said I am selling 100 shares of VXX and the Apr '13 $24 put against it for $2.46 giving me an effective short price of $26.46.

And here is a chart that really gives you a visual of what I was refering too with respect to VXX being a decaying asset:

This should be a fun experiment. We have 49 days until April expiration. My break-even is my short price of $26.46, which is only about 40 cents shy of the recent high that printed this week when the volatility popped more than 30% in a day. As I continue to see a long bias in the market I don't see a real threat of volatility getting way out of control. And if I am wrong, due to the nature of this particular product I would feel comfortable waiting it out as not only is volatility mean reverting but this asset really can only decay overtime due to how it is composed.

Good Luck Trading!

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  1. I actually love the concept of this trade, I've done it myself in the past only it didn't turn out so nice. Long story short is I was short VXX in July 2011, we can look at the chart and see what happened in August. I decided to pull the plug and rally my resources around another position, even though this was reverting at some point seemed like the closest thing to a sure bet where none exist.

    While we know that VIX is mean reverting and VXX a decaying asset, my only caveat to remember is that this instrument does not act like anything else you've probably traded in the past when it comes to upside movement when things get hairy. Maybe currencies or a futures class that isn't so liquid would be a good second. We've all heard that stocks don't crash up, this one does.

    If you've got deep pockets and don't scare easily, this is a good money maker that I had intended on keeping as part of my overall portfolio strategy. Its particularly attractive if you have portfolio margin. This trade is even more appealing to me once volatility spikes or reaches what looks like extremes. It doesn't mean it can't get worse, but fear doesn't last in perpetuity.

  2. Thanks for the perspective. I know that this thing moves big to the upside when it moves and because I do not have unlimited capital I am only in a 1-lot of this position.

  3. Ok, so Volatility has collapsed to about $20 on the VXX and I am able to book $200 of a possible $255 max profit with 25 days to go. So I am going to close this position early and book the profit and look to put a similar position back on with another uptick in volatility.