What's This VXX Trade Telling Us?
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Transcript of What's This VXX Trade Telling Us?
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Hi, My name is Steve and I‘m with Options
Trading Research, today were reviewing
our recently published article…
What'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:
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.
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