Low risk VXX option strategy

Thnx for the post. Interesting.
I have not had time to digest, but my initial thoughts (likely premature):
(1) Since the option volume on UVXY now almost matches that on VXX, UVXY should not be ruled out, as it is a 1.5X leveraged version.
 
Yeah that's a good point. If spreads are similar then it is definitely a possible alternative. I will give it a go with VXX first and maybe run one in paper trading for UVXY.
But I like the fact that it's a strategy that requires very low maintenance.
 
the learner said:
Hi, I posted this in the ETF section but maybe it is better to discuss this strategy here since it involves options.

This strategy seems to make sense and indeed quite low risk unless very big unanticipated drops in VIX. So maybe we should just avoid that when VIX is above 40?
Any opinion?
The article is here:
https://tradingmatex.com/low-risk-vxx-options-strategies/
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Glad you posted in this section since VXX is actually NOT an ETF. It's an ETN.

But anyway let's look at this option strategy:

  • – Selling 2 puts strike 12 maturing in 75 days
  • – Buying 2 puts strike 15 maturing in 75 days
  • – Selling 1 put strike 17 maturing in 75 days
  • – Buying 1 put strike 20 maturing in 75 days
So, essentially we are buying a put bear spread (strikes 17 and 20) funded by a 2x put credit spread (strikes 12 and 15).

First of all, the strike 12-15 put combo is not a credit spread. It's a debit spread because the strike-12 put will sell for cheaper premiums than what needs to be spent to buy the strike-15 put so there is no funding to the strike 17-20 bear spread just so you know. Unless this is a typo, this strategy is doing two debit bear spreads.

Second, the biggest problem with buying options is theta. Erosion of value over time. With a longer expiration, theta problem is alleviated a bit but still not eliminated. Basically if VXX doesn't move much, you won't get much profit and would even get losses. If VXX is projected to move a lot, chances are it's already priced in and again you won't get much profit and would even get losses.

Third, since the option is American options, you still get the problem of early assignments leaving you scramble to exercise to cover. Given it's puts and the Fed just pledged that it won't raise interest rate until after 2023 so the risk for early assignment is quite low but still. And for that reason, I always prefer European options.

Overall, I don't see this strategy yielding much profit. Yes it's low risk but it's also low profit too.
 
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The problem is the options sellers know the risk and price that stuff in, so those options cost $$$, cutting into profitability, I'd guess to such and extent that there is no alpha.
 
Something seems off with the example posted. The referenced test date is 3/7/2021, which is a Sunday (non trading day) -- Why use invalid data? Just plugging in the referenced strikes is reflecting a ever increasing loss so far. I have done similar BWB's on SPX before with some success, but the sweet spot for those BWB's is with a stationary or slightly increasing underlying after a pop in volatility. VXX and UVXY erode at substantial rate, which seem to be problematic for that structure. Not finding what I had hoped for.
 
stepandfetchit said:
Something seems off with the example posted. The referenced test date is 3/7/2021, which is a Sunday (non trading day) -- Why use invalid data? Just plugging in the referenced strikes is reflecting a ever increasing loss so far. I have done similar BWB's on SPX before with some success, but the sweet spot for those BWB's is with a stationary or slightly increasing underlying after a pop in volatility. VXX and UVXY erode at substantial rate, which seem to be problematic for that structure. Not finding what I had hoped for.
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Not to mention once it goes 15 which is quite common given it's a bull market. And since it has 2X of the position of the debit spread, the loss might not be covered by the profit from the 1X debit spread even when the net delta might be higher.
 
Added today on interactive brokers. Strikes 6-10 (2x) and 17-18 (1x) on May expiry.

No risk on the upside. Breakeven on the downside is about 25% from current levels (around 9$). Max profit is 1/3 of the max risk.
 
the learner said:
Added today on interactive brokers. Strikes 6-10 (2x) and 17-18 (1x) on May expiry.

No risk on the upside. Breakeven on the downside is about 25% from current levels (around 9$). Max profit is 1/3 of the max risk.
More...
Please keep us (me) informed of your experience with this. Is this a "set and forget" trade, or would you have exit target prices and possible loss early exit? Can you share your entry prices? I'm guessing you entered a "paper money" trade, as I do not observe your trades on some of the strikes. Here is what I see in TOS with the trade you just placed, but don't know your entry pricing to verify.
Pricing here is MID on low liquidity strikes, so may not be indicative of what is realistic.
upload_2021-3-23_8-31-7.png


I have likely misinterpreted something as max profit / max risk seems more like 1/7 instead of 1/3.
 
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stepandfetchit said:
Please keep us (me) informed of your experience with this. Is this a "set and forget" trade, or would you have exit target prices and possible loss early exit? Can you share your entry prices? I'm guessing you entered a "paper money" trade, as I do not observe your trades on some of the strikes. Here is what I see in TOS, but don't know your entry pricing to verify.
Pricing here is MID on low liquidity strikes, so may not be indicative of what is realistic.
View attachment 255398

I have likely misinterpreted something as max profit / max risk seems more like 1/7 instead of 1/3.
More...


Your short side is 4times your long side
In the VXX example above the difference between the credit spread is 3 and the diff between the debit spread is also 3
 
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