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…
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What's This VXX Trade Telling Us?
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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.
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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.
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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.
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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.
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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.
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So what's the deal with this VXX trade?
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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.
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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.
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Otherwise, the breakeven point is $30.80.
The loss is unlimited if VXX shoots
higher, so there's certainly some risk.
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However, the VXX rarely remains
elevated above $30 for any length of time.
Check out the chart:
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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.
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So, should you make a VXX trade like
this?
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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.
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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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