Sold More VXX Naked Puts

The premiums on VXX are just hard to resist, so I didn’t.  I like VXX as an indirect hedge for most of my other long positions and think even on a lull in volatility the premiums are still worth selling out of the money.  While VXX was trading at $22.32 this morning (above its low) I sold three VXX October 20 naked puts at $0.70 each and received $207.86 after commissions.  My move into more VXX naked puts today wasn’t completely based on a belief that VXX is at a bottom right now, but more that it won’t go much below my strike, if it even goes that far.

In April VXX went as low as $17.84 intraday before recovering.  I don’t see any time it has closed below $18 yet, but I assume that eventually it will, but doubt it’ll stay down too long.  Even if/when it gets down into the $17-18 range again, the shares that I might buy at $20 won’t be very deep in the money and I still think I’ll be able to sell $20 strike covered calls all day long for a good return. 

For example, as I’m writing this post VXX is trading at $23.00.  The October $28 strike calls are showing a $0.75/0.85 bid/ask.  I’m assuming a limit order at $0.80 would hit pretty easily.  Based on a cost per share of $22.21 (after premiums are deducted and commissions are added on) that would give me a 3.5% return in a little over seven weeks before expiration.  Even if I had longer until expiration and repeated this once every two months, six times per year that would annualize out to a 21% return using a strike that’s $5.00 out of the money and doesn’t include any potential gains in the underlying shares that are possible too.

My current exposure to VXX is worth $16,600 (3 Sept 20 puts + 3 Oct 20 puts + 200 shares trading at $23.00), not including premiums received.  My account balance with Interactive Brokers is down to $96,000.  That makes VXX worth a touch over 17% of my account.  I like it a lot, but I’m not willing to go any heavier into it yet.  Once I’ve had a good year of trading it I might go as much as 20-25% of my account, but that’s still pushing it for something that isn’t guaranteed.  If it works, I look great.  If it doesn’t I’m an idiot for putting so many eggs in one basket.

Heads up, I won’t be posting an index chart this weekend.  My brother is getting married and I’ll be with family and friends all weekend.