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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3 comments:

  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?

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  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.

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