As my VXX position continues to drop in value I continue falling behind the indices’ returns each day the markets move higher. While I don’t think they’ll continue this trajectory forever, I hate missing the ride while it lasts. With VXX still sitting there as my hedge in case of a reverse course for the market I started the day looking for some new opportunities to dig my heals in deeper.
I started with BA after their earnings call yesterday. While BA was trading at $71.36 I sold one BA December 67.50 naked put at $1.85 and received $184.29 after commissions. This gives me almost 8% downside protection before I break even on a BA correction. I also stand to make almost 17% annualized. Take note though, that 17% would be if I had cash in reserves to back the position. I don’t, at least not in full. I’m working off of potential margin right now. With my cost per share down to $65.66 if assigned, I wouldn’t be terribly upset with taking ownership of BA and writing covered calls on it. I see good support at $65.00 and then at $62.00 if that breaks. That gives me plenty of room to work this into a positive position if it doesn’t stay up where it is today. I think BA’s dividend yield would be strong enough to keep the shares from falling much from there.
After that order hit I started eyeing MDY as I watched it hit highs not seen since the beginning of May. While MDY was trading at $149.92 I sold one MDY December 145 naked put at $3.60 and received $358.99 after commissions. I have more than a 5.5% cushion before I breakeven on this trade and have a potential annualized return greater than 15%. I see potential support around $145 for MDY and even better chances of support at $142.50. With these premiums subtracted from the strike I should have plenty of room to hold on. Of course that’s if the current trading channel MDY is running in breaks. If that doesn’t happen I’ll just keep my premiums and move along.
Moving along is what I’ve been doing more of lately. While I sit on a handful of naked puts that are getting farther and farther out of the money I am starting to add new naked puts (like BA and MDY) that are a little farther out of the money than my usual strikes and offer smaller returns. I’ve made this change for two reasons. If I’m going to set myself up for potential margin use, I want to decrease my probability of being assigned the shares. Going farther out of the money helps with that cause. Also, since I’m selling new puts based on cash I don’t have the ROI is greater and I don’t have to push it as closely for higher premiums. If I can average 16% annualized returns (or better) per trade and manage my account to 135% of the available cash I have (i.e. if I had $100k, I’m “spending” $135K in underlying value of my puts), then my total return is magnified greatly. In this example I could take 16% and multiply it by 135% and I get an annualized return of 21.6%. That doesn’t account for days I’m not invested that high nor for days I’m invested more than that. It also leaves out the fact that I will take some losses along the way. Add it all together and I should be able to make 15% annually assuming I don’t have many big losses that cripple me. Eventually the markets will drop for more than a couple of days and that’s when this path to easy gains ends. I expect my VXX position to lighten any fall in such a case. Until that happens I plan to continue adding new naked puts every few days.
Alex, do you analyze rolling naked Puts vs taking assignment and selling covered calls? I usually like to roll out when workable instead of tying up cash on covered calls.
Alex,
Like you, I’ve been sitting on VXX puts – I’ve lightened up on them recently, but from what I’ve read, many (if not most) say that because the way the VXX contango is structured, it won’t bounce back. I have resisted the urge to take some losses – and I’ve “hedged my hedge” by selling VXX front month calls on the way down, but I’m interested on what you think VXX will do and what your VXX strategy is.
Thanks for your response.
John
John,
I could be completely wrong here, so take it with a grain of salt. The way I understand contango is that it kills you on the way down, but can reverse (backwardation) and benefit you on the way up, but that’s rare. I’m sitting on my VXX shares for now and want to see how it reacts when volatility picks up again one day. We’ve seen reactions of 5% to the upside on single days, so when we get a real correction I expect a much better spike. It could be months and even more than a year before that happens, but I’m staying patient with it.
That said, days like today when the SPX is basically flat and VIX is only down 0.36% it’s just painful to see VXX down 2.83%. I have about $10k left in VXX and that’s my total downside risk remaining (not counting premiums I’ve already taken in). I expect VXX to hit $25 again one day, if not $30-35 on a severe spike. If I sell at $25 then that’ll give me a $9,600 gain from here and more than $4,200 from my average cost per share. To me, that’s worth the risk of waiting. If I had it to do again I would’ve bought puts well out of the money as a hedge to my hedge. I’m considering buying some December 11 puts for $0.50-0.55 just in case, but haven’t done it yet. At the rate VXX is dropping those have plenty of time to turn profitable and if they don’t then it probably means VIX has stabilized and our VXX positions are moving in the right direction for us.
Thanks Alex….
I have a little more exposure than you do as i’ve been stagger-selling VXX puts on the way down, but I’ve been stagger-selling calls as well. I’m careful to cash out the calls when they hit my 70% profit level. But the problem I’m seeing is that, on the rare sell-off of the market days, the VXX doesn’t move up very much when correlated on the 5% drops in the VXX we see on the market up days. Additionally, I’m looking at Nov and Dec and volatility is primed to spike, but it isn’t being reflected in the VXX futures. I’m kind of stumped here. I wish any kind of catalyst would reverse the trend. Like you, my gut tells me not to get rid of my positions just yet.
Keep posting on this…much appreciated.
@ Mule – sorry your comment was stuck in the spam filter. Not sure what key word tagged it this time. Anyway, yes I sometimes roll my naked puts, but usually take the assignment and write covered calls out of the money with the expectation the shares will rally back. Since I’m not using my cash for anything else right now (aka, not even in a simple money market) I am not bothered by using my cash to actually buy the stocks, especially if there’s a dividend in play, even if the difference is made up in premiums. Also, with IBKR’s margin rates so low right now the cost to go on margin is negligible.
@ John – I think the Nov and Dec vol is so low because people are so giddy with this rally that they are starting to forget that it will end eventually. I’m counting on that for an even better spike in the VIX. Overall though, I think the majority of big money investors see better days after a little dip, so longer term vol doesn’t get pushed down as hard as it would if there was less confidence in the markets’ staying power.