VIX/VXX trade idea

R

rocky_raccoon

Hi y'all!

I've been thinking about the following trade on VIX/VXX put options:

Sell N ATM VIX puts for the front month
Buy M ATM VXX puts for the front month, where N and M are chosen in such manner so that VIX credit is more than VXX debit.

For example, using some of today's prices:

Sell 2 Dec 16 VIX puts @1.10
Buy 1 Dec 31 VXX puts @1.90

The net of this transaction is a credit of $30/combo

These are possible scenarios:

If VIX spikes, both options will expire worthless and the trade will have a profit of $30/combo

If VIX drops, VIX put may go up to 2 (VIX getting to 14, which is rare) thus presenting a loss of ~2/combo on the VIX side. VXX, on the other hand, has no floor and may drop a lot lower than VIX (in % terms) due to contango effects. Hence, VXX put should profit more or at least close to what VIX put would lose.

If VIX hovers around 16 at the time of the DEC expiration, VXX will most likely decline (contango) and both legs will be profitable.

I don't intend to keep these position until expiration unless there is a big spike in VIX.

What are your thoughts?

RR

PS. I am aware that VIX options expire earlier than VXX and VIX options are really options on VIX futures.
 
cool one - i dont hate on it, but something to consider is as you approach maturity of the vix options is that vxx is less and less reliant in movement in the front month contract, which is where you sold your options.

are you going to put this trade on?
 
Quote from Jgills:

cool one - i dont hate on it, but something to consider is as you approach maturity of the vix options is that vxx is less and less reliant in movement in the front month contract, which is where you sold your options.

are you going to put this trade on?
More...

As time progresses VXX term structure will move more to the next month futures. I think the position should be closed about a week before the expiration.

I put a paper trade on with the parameters that I described. Need to do an experiment first before committing any real money :-).
It is currently in the money by ~$30/combo.
 
Quote from rocky_raccoon:

As time progresses VXX term structure will move more to the next month futures. I think the position should be closed about a week before the expiration.

I put a paper trade on with the parameters that I described. Need to do an experiment first before committing any real money :-).
It is currently in the money by ~$30/combo.
More...

as of now it looks like it would have been a good trade.. can you backtest it?
 
What time frame in the last month (I assume October) would it not work?
I would not trade it mechanically. The entry criteria is VIX at or below 15, contango in VIX futures, and there is 3-4 weeks till expiration.
 
yes - october into november expiry. it all depends on timing and i'm not sure if u had chosen the 16 puts to be close to ATM to becasue u wanted 16 puts, for my breif test i looked at the ATM options at the time of trade, which was the VIX nov 18's which expired way in the money. anyway i dont want to get this off topic, its your trade - i'm just trying to do some outside analysis to look at it, i didnt find anything material for or against it yet
 
Quote from Jgills:

yes - october into november expiry. it all depends on timing and i'm not sure if u had chosen the 16 puts to be close to ATM to becasue u wanted 16 puts, for my breif test i looked at the ATM options at the time of trade, which was the VIX nov 18's which expired way in the money. anyway i dont want to get this off topic, its your trade - i'm just trying to do some outside analysis to look at it, i didnt find anything material for or against it yet
More...

If VIX was at 18, I would not put this trade on.
Today's 16 was a compromise of uncertainty: if VIX goes higher through December, the trade should work; but if it goes lower, the projected loss should be covered by VXX put gain.
 
Quote from rocky_raccoon:

If VIX was at 18, I would not put this trade on.
Today's 16 was a compromise of uncertainty: if VIX goes higher through December, the trade should work; but if it goes lower, the projected loss should be covered by VXX put gain.
More...

keyword "should" so much for quantitative finance.. find a cleaner way
 
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