Monday, August 31, 2015

VXX Analysis

Update 9/15/2015: The premium cost of exiting VXX fell below 10 cents. I have closed the position to avoid additional time risk.

Shares declined by 4.6% over 15 days, or a -112% annual rate. The options produced a 466.7% yield on debit, for a +11,356% annual rate.

The VXX exchange-traded notes track futures that inter turn track the VIX -- the implied volatility of the S&P 500.

Volatility took a huge leap upward when global markets panicked over the course of the Chinese economy and markets. High volatility suggests that I place trades that will profit as that volatility declines in a reversion to the mean.

My trade was based on a strangle position opened by a regular on the Dough education and trading site, Rachel Fox, who has created a nicely done beginners tutorial on options trading that can be seen here.. I converted her strangle to an iron condor in order to lessen the buying power impact on my account.

[VIX in Wikipedia]


I shall use the SEP series of options, which trades for the last time 18 days hence, on Sept. 18.


Click on chart to enlarge.
VXX at 11:20 a.m. New York time, 30 days hourly bars
Implied volatility stands at 115%, which is four times the VIX, a measure of volatility of the S&P 500 index. VXX’s volatility stands in the 00 percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

Iron condor, short the $32.50 calls and long the $34 calls,
short the $21 puts and long the $19.50 puts,
sold for a credit and expiring Sept. 19.
Probability of expiring out-of-the-money


The premium is $0.51, which is one third of the width of the position’s wings.The stock at the time of purchase was priced at $26.41.

The risk/reward ratio is 1.8:1.

The zone of profit in the proposed trade covers a $5.75 move either way. the equivalent of three days' movement as measured by the average true range.

Decision for My Account

I've opened a position on VXX as described above.

-- Tim Bovee, Portland, Oregon, Aug. 31, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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