I’ve been trying to decide what to do with my VXX position for weeks, if not months. Finally this weekend I figured out a plan that limited my downside and left a good bit of upside potential. I started off by looking at the cost of just buying puts for protection and then saw that the call premiums were still pretty good even far out of the money. While VXX was trading at $44.53 I bought to open two VXX June (2011) $50 puts for $14.30 and paid $2,861.73 including commissions. I then sold to open two VXX June (2011) $70 covered calls for $4.80 each and received $958.27 with commissions. This “options collar” protects me to the downside and leaves more than enough upside room than I’ll probably need.
At the time of my trade the bid/ask spreads were fairly wide so I aimed somewhat close to the ends that would makes sure my orders hit, even with the risk of leaving some on cash on the table. I considered going for the $60 strike calls, but they only offered about $1.50 more than the $70 strike calls and cut my profit off $10 sooner. Although I am starting to doubt VXX has a big chance of making it back to the $60s in the near term I decided to leave that chance of an extra $1,700 ($8.50 x 200 shares) out there for me. Based on the price I could’ve sold for at the time and exited the position I have only $4.05 downside $15.95 upside per share. In full terms, that’s only $810 I can lose before June expiration, but $3,190 upside I can still make. I ran the math like this:
- $44.53*200 = $8,906 = value of shares at the time of my trade
- $2,861.73-$958.27 = $1,103.46 = cost to create collar
- $8906+$1,103.46 = $10,809.46, $10,809.46/200 = $54.05 = new cost per share
- $54.05 – $50.00 = $5.04 = The most I can lose per share since I own two $50 strike puts and can sell at $50.00
- $70 – $54.05 = $15.95 = The most I can make per share since I am short two $70 strike calls and could be forced to sell at $70.
I hated to add to my cost per share rather than just reduce it with covered calls further, but decided I didn’t want to take the chance of a correction hitting and seeing VXX take off. As the day has dragged on I’m more confident in my position and think I could’ve even gone in the money on my covered calls and not had a great deal of risk in having the shares assigned. I’ve seen the VIX go up today, but VXX go down. That’s not what I like to see on a day that the markets have been down decently most of the time.
In other trading news… I’m trying to be more proactive about closing short puts and calls that are close to worthless and opening new ones farther out and closer to the stock’s current trading price. I had that opportunity with ITRI today. While ITRI was trading at $57.54 I bought to close one ITRI December $65.00 call for $0.15 and paid $16.01 with commissions. I waited a minute as I saw it starting to recover and then while it was trading at $57.66 I decided not to push my luck and sold one ITRI January $60 covered call for $2.00 and received $198.99 with commissions.
My cost per share is now down to $68.73 after starting off up at $80.00. After the initial slide ITRI has spent most of its time in the $57-$62 range with a few ventures out on either side of that range. I still think ITRI’s day will come again when it can return to its old highs, but that might not be for more than a few months and I’m quite content selling covered calls in the meantime. Based on the belief that ITRI will return to its upper side of this range I could’ve waited to sell new calls, but I prefer to lock in the premiums when I can get them rather than risk losing more to the downside. If ITRI takes off above my strike then I’ll be able to plan on selling my 100 shares and can start allocating the cash used to hold the shares towards a new position. If it drops much more I’ll have to consider adding a new naked put, maybe at the $55 strike.
Looks good. I’ve also been monitoring what to do with my VXX position. For now, I’m sticking put. I’ve got December 44 Covered Calls and December 44 Naked Puts on a 3/2 ratio. Assuming VXX stays above 44 for expiry, I’ll be taking a total loss on my VXX series of trades of a little under 2.5% of my portfolio value and will consider selling further Naked Puts.
I don’t intend to sell any Covered Calls against my ITRI position for now. Maybe if it rises a few percent.
My NUE Naked Puts expired worthless last week and I’ve a limit order in to sell further Naked Puts for January expiry – also at a $36 strike. With the Premiums available on these, I’ll get NUE for less than it’s 52-week low if assigned (assumming my order hits of course).
Your VXX position might work out if we can keep getting these rocky days mixed in to keep it afloat. I don’t know if I’ll get back into VXX once my position is done in June, but that’s part of why I put the expiry so far out. I didn’t want to have to make the decision yet.
I might end up regretting my ITRI covered calls. I put a limit order in this morning to add another naked put at Jan 55. It’s set for $2.00 right now with the bid/ask at 1.71/1.80. I might lower it tomorrow if ITRI keeps holding its ground. I missed the dip this morning and saw this option trade as high as $2.05.
I haven’t ventured into NUE yet, but those premiums do look nice.
I sold a new CSX put this morning. I’m starting to write my post now.
i think its a mistake holding on to vxx with a hope that it would go up. I sold mine and cut my losses. VXX is not going up, it would go back to $20-$24 range in about 4-6 months. If anything buying a PUT is a much better solution.
@ Mateen – Are you confident enough about VXX being dead in the water to sell naked calls? You might be right, but it has been nice the past couple of days to be kept even on days when the market is down substantially. I’m iritated with myself for not buying puts sooner. I think I’ll roll my covered calls to lower strikes once more value melts out of them and we get past the latest worries over the PIIGS.