This is an interesting trade to me because it’s a derivative on a derivative. VXX is the iPath S&P 500 VIX Short-Term Futures ETN. In other words it’s an “ETF-like product” that tracks the VIX, although not at a beta of one. The VXX is less volatile
=============
Article Content:
This is an interesting trade to me because it’s a derivative on a derivative. VXX is the iPath S&P 500 VIX Short-Term Futures ETN. In other words it’s an “ETF-like product” that tracks the VIX, although not at a beta of one. The VXX is less volatile than the VIX. My plan is to take a long term position in VXX and add to it on lows (under cost after premiums) through naked puts and dump it on spikes (above or cost after premiums) either straight out or with in-the-money covered calls.
I see VXX as an indirect hedge for other options I’m selling. VXX tends to have an inverse relationship with the broader markets, so as the markets move higher the VIX (and therefore VXX too) move lower and vice versa. With the VXX less than one and a half years old there’s not a lot of historical data to work with, but I expect it to move like the VIX over time albeit with higher lows and lower highs in general than the VIX. As my short option positions increase in value (meaning my profit goes down), my VXX position should gain in value.
While VXX was trading at .30 I sold two VXX August 24 naked puts at .05 and received 8.57 after commissions. This is my first trade on VXX and I am easing in with less than ,000 worth of underlying value at risk. I plan to add to it again under , but maybe even at if my August 24 puts are assigned early. I like the VXX trade for a couple of reasons. The first is what I mentioned above with the hedge it brings to my portfolio, but also because I believe it doesn’t stand a real chance of ever going to $content and should bounce around enough to be a consistent trade in my regular rotation of positions. I don’t expect it to be a winner each round and can foresee me holding it for a paper loss for months on end before it pops again. I think that pop is always inevitable though and that’s where the safety in it is.
If I had I come up with this strategy back when VXX was under (it even went under , but I’m not even saying I had to buy at the low) and then sold at (it went up above ) and if I had a full position of 10% of my portfolio I’d have made ,000, which is about half as much as I’ve lost during this correction. I’m not ready to take a full position at a ~ cost right now, but think it’s a good start as I continue to add to it when the VXX drops some more. Of course VXX could stay above .00 through August options expiration and I just pocket the premiums and redo the order.
———————
