VXX - a trending stock

[rocky_raccoon]

Here is a VXX trading idea:

1. Wait for a VXX spike (even a minor one)
2. Enter a monthly credit call (or debit put) spread that have risk:reward ratio < 1 (e.g. if VXX is @36, sell 32/36 call spread).
3. If VXX spikes in the next following days, roll the spread higher while increasing it's size (the initial size should be 1/3rd of the projected max size). Repeat up to 2 times.
4. Once VXX starts drifting lower and position shows 30-50% profit, start reducing it. Alternatively, you may sell VIX (sic!) puts if VIX goes to 15-16 area. This will create a synthetic iron condor.
5. If the spike continues and all 3rds are in, roll to the next month, same or higher strikes after a week is left till expiration.
6. Keep repeating step 5 until spike is over (should not last more than a month anyhow).

I did steps 1-4 during the last spike reducing my position to the original 1/3rd on last Friday. My current position is 30/34 credit spread with possible loss smaller than the profits I took when VXX came down. Technically it is risk-free at this point.

 

[samer1]

I have created a backtesting tool for option strategies in Excel. I use the historical volatility as an input (instead of implied volatility). The tool can use up to four option positions.

Enclosed you will find the return of the following strategy:

Maturity: 1-month
Every monday, you sell a call option with strike at one standard deviation OTM. You also buy a call option with strike at two standard deviations.

Hold this position until the end.

 

[samer1]

Backtested strategy:

Each monday do the following:

1. Sell an ATM call option with a maturity of one month.

2. Buy an OTM call option (1 std. dev.) with a maturity of two months.

Close the position, once the ATM call option expires.

 

[rocky_raccoon]

Quote from samer1:

Backtested strategy:

Each monday do the following:

1. Sell an ATM call option with a maturity of one month.

2. Buy an OTM call option (1 std. dev.) with a maturity of two months.

Close the position, once the ATM call option expires.

What's your position size relative to the account size?
You should've used historical option prices for this backtest

 

[Jgills]

i think the first thing you should do is rebuild vxx to understand the negative drift

 

[samer1]

Quote from rocky_raccoon:

What's your position size relative to the account size?
You should've used historical option prices for this backtest

It is one hundred percent. So if you short a call, and it expires worthless, your account increases by 100%. The number is misleading. Hence, one should divide the performance number by 100 to have some realistic result.

I do not have access to option prices. If I had access, I would have used the real option prices instead. Hence, I calculated option prices on my own, using historical volatility. I konw this is somehow flawed. however, it might give you a hint what is working...

 

[rocky_raccoon]

Quote from samer1:

It is one hundred percent. So if you short a call, and it expires worthless, your account increases by 100%. The number is misleading. Hence, one should divide the performance number by 100 to have some realistic result.

I do not have access to option prices. If I had access, I would have used the real option prices instead. Hence, I calculated option prices on my own, using historical volatility. I konw this is somehow flawed. however, it might give you a hint what is working...

TOS has free end-of-day historical option quotes. It should be enough for this type of backtest.