What’s With The Huge Options Trade In VXX?

| January 7, 2015 | 0 Comments

VIXWhat’s With The Huge Options Trade In VXX?

If you trade options or pay attention to market volatility, you’re probably aware of VXX. VXX, or the iPath S&P 500 VIX Short-Term Futures ETN, is one of the most popular exchange-traded products out there.

As a matter of fact, the average volume for VXX over the last three months is a whopping 50,000,000 shares per day!

As a 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.

After quieting down in mid-December, VXX has spiked the last few days and is sitting at $34.66. That’s 37% below the 52-week high of $55.22, and 35% above the 52-week low of $25.64.

So what does today’s big VXX options trade tell us?

A trader with plenty of cash sold close to 15,000 February 53 calls in VXX. The premium collected was $0.95, and open interest shows it to be an opening position.

First off, the trader is collecting a ton of cash here. Total cash collected is over $1.4 million. That’s a sizeable reward should VXX close below $53 by February 20th (expiration day).

However, there is also unlimited risk using this strategy.

If VXX climbs above $53 and stays there, there’s not a limit to what the trader could lose if the position is not closed. Keep in mind, this isn’t a spread or covered call, these are naked options. Moreover, during periods of duress, VXX could easily trade over 53 for an extended period.

So is unlimited risk worth $1.4 million?

Most likely, the answer is yes. You see, while volatility tends to show extreme spikes throughout its history, they also tend to be short-lived. Basically, investors tend to panic all at once, but then they recover quickly.

Here’s the chart of VXX:

huge trade in VXX options, a chart of VXX

As you can see from the chart, volatility spiked three other times (besides this current spike) since last July. However, in each case, it came back to earth quickly. Chances are, VXX will be well under 53 by February, even if it keeps climbing in the coming days.

Don’t forget, even with the recent scare, VXX is still a ways away from the 52-week high. Not to mention, as long as crude oil remains this cheap, it’s hard to have any serious concerns over the US economy.

Should you also short the VXX?

I like this trade a lot, but I don’t recommend it for most people. Selling naked calls can be very risky. Instead, it’s not a bad idea to buy a VXX put or two and sit on it through February or March.

At-the-money puts may be a bit pricey due to VXX’s mean reverting nature. However, there’s still plenty of upside in out-of-the-money puts should you go that direction. Either way, I believe volatility will be easing off sooner rather than later.

Yours in Profit,

Gordon Lewis
Options Trading Research

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.