What’s This VXX Trade Telling Us?

| April 6, 2015 | 0 Comments

VIXWhat’s This VXX Trade Telling Us?

There are good reasons why trading iPath S&P 500 VIX Short-Term Futures ETN $VXX is extremely popular.  With an average volume of nearly 50 million shares a day, both retail and institutional traders must be active in this ETN.

As a quick refresher, VXX is a way to get long the first two months of VIX futures.  You can read more about it here.  In a nutshell, the most popular volatility index is the VIX, or fear gauge.  However, the VIX isn’t tradable on its own.  As such, the VXX is the next, best thing.

For even more information on the VXX, check out the official product page here.

Volatility has finally settled down the last month after trading at elevated levels for a time.  As such, VXX is back down to near 52-week lows.

At $25.06, $VXX is down about 20% on the year.  That’s just 2% above the 52-week low and 46% from the 52-week high.

So what’s the deal with this VXX trade?

Here’s the deal…

A trader sold over 6,000 May 30 calls in VXX for around $0.80 per option.  That works out to a little under $500,000 the trader collected in premium.  That’s also the max gain on the trade.

If VXX closes below $30 on May expiration, the trader gets to keep all the premium.  Otherwise, the breakeven point is $30.80.  The loss is unlimited if VXX shoots higher, so there’s certainly some risk.

However, the VXX rarely remains elevated above $30 for any length of time.  Check out the chart:

trading VXX, a chart of VXX

As you can see, VXX doesn’t tend to stay elevated above $30 after upward spikes.  After trading at higher than usual levels early in the year, it’s now dropped to nearly 52-week lows.

So, should you make a VXX trade like this?

VXX closing below $30 on May expiration has very high likelihood of occurring.  Extreme contango in the VIX futures is also helping to ensure the VXX is going to continue its descent.

However, I don’t recommend selling naked calls unless you’re a very advanced trader.  It’s a very risky proposition due to the unlimited loss potential.  More conservative traders can instead consider buying VXX puts.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.