Buy the Blood (VXX)

[Steven Place]

Going to start a new VXX trade, very similar to what we did here.

 

Here’s the trade. We are SCALING IN which means don’t put on full size. Anticipate adding to this trade two more times.

Buy to open VXX Oct/Nov 28 put calendar for 1.09.

If VXX heads to 32 we will add the 30 calendar.

[Steven Place]

Going to add to the trade now that the VXX is near 32:

Buy to open VXX Oct/Nov 30 put calendar @1.34.

This increases our upside breakeven, increases our short deltas, and increases the theta gains.

[Steven Place]

After being WAYYYYYY too early on this trade (I should have waited for VIX > VXV signals), we are left with:

Long Nov 30 puts
Long Nov 28 puts

And while I do think the VXX continues to head lower back into the high 20’s, holding these long puts is tremendously difficult because of the theta risk in the trade, and the fact that the VIX is stubborn here.

So I want to conver these puts into Nov/Dec put calendars.

This order gets a little tricky.

You can either split it up by first:

1. Sell to close VXX Nov 28 puts @0.50
2. Sell to close VXX Nov 30 puts @1.34

And then:

1. Buy to Open VXX Nov/Dec 28 put calendar @ 0.84
2. Buy to Open VXX Nov/Dec 30 put calendar @ 1.03

If you want to get really tricky, you can put these two trades out there… these are CUSTOM orders specifically for thinkorswim. Technically they are called “ratio time spreads.”

BUY +20 1/-2 CUSTOM VXX 100 DEC 14/NOV 14 30/30 PUT/PUT @-.30 LMT

BUY +20 1/-2 CUSTOM VXX 100 DEC 14/NOV 14 28/28 PUT/PUT @.35 LMT

You can adjust the sizing to what is needed.

I like this roll because:

1. It reduces the short deltas by 80%
2. It flips the theta risk from negative to positive
3. The cost of the roll is about 10 cents per spread once you include commissions

Ideally what happens here is that the VXX hangs out above 30 and then we can hold onto these long puts into Christmas, as the VX futures curve will be super steep and the VXX will get poleaxed.

[Steven Place]

Do note: if you didn’t get into this trade to begin with, my pain is your profits. I like buying Nov/Dec put calendars in the VXX here, implement a scaling approach in case we see a pop in volatility again.

[Steven Place]

Going to exit this position here:

Sell to close VXX Nov/Dec 30 put calendar for 1.35
Sell to close VXX Nov/Dec 28 put calendar for 1.27

7% return on risk.

This is one of those trades that made a ton of sense but I was way too early on. Next time wait for the proper signal instead of trying to anticipate.

[Author]

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