Hedge in VXX

[Steven Place]

I haven’t played this ETP to the long side in quite a while, and it can still be very risky to the upside, but here’s my rationale:

This is a chart that shows the difference between near term and next term volatility futures. The VXX does great when this relationship flips, and we haven’t seen a flip in a while.

Here’s how I want to trade it:

Sell Jun 20 Call @2.72

Buy 2x Jun 23 Call @1.52

Total debit: 0.32

This is great because if the VXX continues to head lower, it’s not a ton of risk. And if we get a risk event, there’s plenty of upside.

Do note that this does tie up margin. Max risk here is actually 330 per spread, and if VXX pins 23 by Jun expiration then you’re hosed.

Which is why you won’t hold to expiration, just bail if nothing has happened by May expriation.

[Steven Place]

Going to buy back the 20 calls here to just have the Jun 23 calls sitting on the table.

I’m doing this for a few reasons:

1. The breakeven in the current structure is at 24. If I add more risk to the trade, the breakeven moves to 20.

2. Losses into jun options expiration could be much, much larger if I leave the short options on. A pin of 23 would be a loss of over 300 per spread. By buying back the short options I’m “averaging out” the risk a bit more.

Order:

Buy to close Jun 20 Call @0.60 or lower.

This is still a “full risk” hedge for me just in case something stupid happens in the next few weeks.

[Author]

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