In the comments section of my last post I was asked about any VXX options I might be considering. I mentioned I thought a naked call on VXX could be profitable. Today I entered a limit order good through Monday and didn’t think it would hit until Monday, but it did. While VXX was trading at $33.98 I sold one VXX December $33 naked call for $7.00 and received $699.26 after commissions.
When I entered the order I think this strike was at the money, but the volatility spike this afternoon sent the premium up to where I could’ve gotten another dime out of it. Even though this is a naked call, which is typically viewed as very risky because of the unlimited loss potential, I don’t see this trade as having a lot of risk. First of all VXX topped out this week at $36.06. When you consider the extreme volatility we saw this week and the amount of fear in the markets, that’s not too high. My cost per share to sell VXX if assigned would be $39.99, almost $4.00 higher than the recent intraday high. In addition, the day VXX hit this intraday high it closed below $32.00. The highest close for the week was $35.43. It’s possible VXX could trade above $40.00 before my option expires, but the risk of it finishing in December above $33.00 is very low in my opinion.
One of the reasons, aside from my expectation that we could rally into the end of the year, is that VXX is flawed. Due to contagion within the instrument, VXX is destined to lose value over time, even if the VIX stays flat to slightly higher. I felt this pain when I was long VXX, but I think I’m playing it on the correct side this time. VXX is a worthwhile tool to use on the long side in a fast slide, but in most market conditions it’s a better one to be short, especially over longer periods of time. I thought about using the September expiration, but decided the December contract was safer. I still think the September $33 (or probably even $30) strike will finish out of the money, but there was no need to risk that yet.
I might add another short call if the volatility continues to contract. If we get another spike into the upper $30s I’ll most likely add another short call at a higher strike when I think the market bottom is in. We might not be at a bottom yet, but with only one call I don’t think I’m overexposed. I have no doubt VXX will sink over time, so I’m not putting a cap on how high I’ll chase it with naked calls if I’m wrong in the near term. I’m assuming I’ll be able to hold the shares short in my IB account if I’m assigned. If this trade works for me it will give me a return of 17.69%. That’s a 59.45% annualized gain. That’s the kind of risk/reward I like.
Nice play Alex! I sold a Dec. VXX Call (Strike 38) as well 2 days ago for about $605 after commissions, not as much premium.
Seeing volatility drop today, I covered my position for a quick 2 day $120 (20%) gain (a little worried about carrying positions into the weekend). Personally I feel that we have not seen the end of volatility this week, and when it comes back I will be prepared to sell another call in a similar situation (VXX in mid – high 30’s).
It’s good you are only doing 1 contract and not leveraged up. Those trades are suicidal in ANY market condition nevermind the current situation. Are you able to predict the future there wont be another blackswan coming out of europe or elsewhere before expiration? vix can spike up well above 40 rapidly.
People never learn, even after 2008/09. Trying to scrap those precious theta while 100% exposed to delta. Naked call selling works great..until it doesnt then you blow up, naked call selling on the vix/vxx is just plain suicide.
@ Jon, nice quick profit. Congrats!
@ Insane, Obviously I cannot predict the future. I understand the risks with this trade. I think the VIX has a reasonable shot at moving above 40 before this contract expires (or I exit early). VXX is different than the VIX though. It’s flawed and will continue to lose value over time. I might get hit with a short term loss, but believe that over time VXX will lose value and this will be profitable.
I wouldn’t say the naked Call on VXX is suicidal. It’s a manageable size and could be closed early or covered by buying 100 shares. Most of the trades here are vulnerable to a significant sell-off, which is the biggest risk IMHO.
VXX climbed nicely today (8/18/11). I’m not hedging or selling another option on it yet though. Mule, you are correct, my other positions pose a bigger risk. I thought about buying SDS to hedge the downside for days, but didn’t do it. Now I want to see if tomorrow gets a bounce. I don’t see a solid turn higher coming yet.
vxx didnt climb nicely, it gapped 22%, iv also exploded. Your trade is 100% short vega and delta. The dec 33C is looking at a 50%+ loss in 1 day and your account’s margin requirement for this position is also guarenteed to shoot up. Now imagine if tomorrow it gets worse.
of course none of this matters if you are just trading 1 lot as a plaything, but the fundamental behind this trade is complete suicide. Any real account executing such trades is guarenteed to blowup over time. You will shown the door before you finish click the button on any option desk. Only a retail would think such trades are not suicidal…
And yes there are major differences between vix spot, futures, and vxx, understanding their relationship and behavior pre/at expiration is critical to not trading blind.
29/33/37 dec fly is far better r/r alternative with capped loss.
@ insane, VXX made it up to the top end of my range today, but not beyond. That’s what made it a nice climb (for me). If tomorrow is bad again I’ll have to consider adding protection or selling another call if I think it’ll be short lived. I’m still not worried about the single call though December.
Also worth noting, tomorrow is options expiration for August. That caused volatility to spike extra, in addition to the market smack down.