Thursday, May 2, 2013

Short Premium in VXX

Believe it or not, but the market continues its grind higher only 3 points off its all time highs after a nice move lower during yesterdays session. If the market continues to grind higher this does not bode well for my overall portfolio as I am leaned to the short side. I think as I write this I am about 200 SPY deltas short. With that said I decided to sell a 19/20 put/call strangle with a kicker buying the 23 call to define my risk to the upside.

Now you may be asking yourself why I would add more negative deltas. Well my thought is that we are either going to have a move that finds velocity to the downside which will cause volatility to pop (think February move with 35% pop) which would be good for my overall portfolio and leaves my max risk on this trade at $90 to the upside. Or the other scenario is we keep grinding higher with little one day sell offs with small pops in vol in which case I don't think vol really goes anywhere between now and Jun expiration. My break even to the downside as it stands is at $16.46. The max gain is around $510.

And for full disclosure, one thing I will be looking to possibly do is sell some 30 calls against the 23 that I bought on a decent pop in vol. This would effectively move my break even to the upside to $30 (a 55% move in vol). These calls are currently trading for about $0.30 and would need to move another $0.20 before I decide to sell them.The new risk profile would look like this:

Good Luck Trading!

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  1. You are likely right...SOMEDAY we are going to 1,720 but not by June expiration :)

    The probability of a touch way out there by June expiration is 4%. I do however think that 1,600 is inevitable. And 1,620 is a possibility.

    Did you ever end up doing anything to define your upside risk?

  2. Not yet, just lazy. Its easier for me to look after regular business hours but then you're not getting the true bxa spreads. I like model out potential trades when quoates are live as I've often found something I like after hours but when you try to put it on during regular hours that quote doesn't really exist.