When in Doubt Short the VXX

[Steven Place]

We aren’t at extreme oversold levels, but we are seeing plenty of fear coming back into the market.

VIX is now greater than VXV, which means the perception of risk is now front loaded. That has marked bottom points in the past.

Here’s the trade I like, putting on decent size here with the intent to add:

Buy to open VXX Aug/Sep 27 put calendar for 0.70

If VXX goes above 33, I will add the Aug/Sep 30 put calendar

The idea here is that the market will bounce soon, vol will come in, and term structure will normalize. If I get lucky enough, I can hold onto the Sep puts for a great basis and just ride VXX lower (as long as VX futures are in contango, which is 80% of the time).

[Steven Place]

Adding another round of calendars:

Buy to open VXX Aug/Sep 30 put calendars @1.14

[Steven Place]

Trade is working out great. Got about 2 days left to expiration– that means if something stupid happens and the VIX spikes you can lose all your profits. We’re at at tricky spot where you have the potential to milk the trade a little more but with a heightened amount of risk.

There’s a few things you can do here.

1. Close out the trade.
2. Trail a stop — if the VXX starts to run higher then you bail.
3. Hedge– I like buying the Aug 31 call to reduce delta risk.

Any of these three will work, just make sure you don’t lose out on hard earned gains.

Also: in hindsight, maybe butterflies would’ve been a better choice as the IV did start to come out of the options.

[Author]

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