What’s This Big VXX Trade Telling Us?

| January 21, 2015 | 0 Comments

What’s This Big VXX Trade Telling Us?

If you’re a regular reader of this site, you know I like to talk about VXX. VXX, or the iPath S&P 500 VIX Short-Term Futures ETN, is one of the most popular exchange-traded products out there.

As I’ve mentioned before, the average volume for VXX over the last three months is nearly 50,000,000 shares per day. That makes it one of the most active exchange-traded products on the market.

As a 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.

Outside of the big spike last October, VXX is as high as it’s been since before the summer. At the current price of $35.62, the ETN is 35% below the 52-week high of $55.22, and 39% above the 52-week low of $25.64.

So what’s the story on the latest big VXX trade?

Here’s the deal…

A trader sold 6,000 VXX Weekly 55 calls which expire on February 27th. The premium collected was $0.91, and open interest shows it to be an opening position.

Since no VXX shares were tied to the trade, it’s likely a bearish call sale and not a covered call strategy. Total cash collected is just under $550,000 for the trade. That’s a decent chunk of change should VXX close below $55 by February 27th.

Keep in mind, selling naked calls is a strategy with unlimited risk. If VXX climbs above $55 and stays there, there’s not a limit to what the trader could lose if the position is not closed. And let’s not forget, VXX could easily trade over $55 for an extended period if investors get spooked.

Is this trade too risky to make it worthwhile?

Well, volatility is certainly sustaining higher levels than it has for some time.

Check out the chart:

large trade in VXX options, a chart of VXX

As you can see, volatility has remained high (relatively) this time around, rather than perform the usual spike-and-drop routine. However, VXX is still trading well above the 50-day moving average, a level it often reverts to historically.

One thing to consider is investors seem to be concerned over recent US economic news. It hasn’t been quite as good as expected. But, we need to remember last month where just above every economic report was better than projected. This is probably just a case of normalization.

And more importantly, as long as gasoline remains cheap, it provides a boost to the economy.

So, should you short the VXX?

As usual with short volatility trades, I like the trade. However, selling naked calls can be very risky. Instead, I’ll stick with my standard recommendation of buying a VXX put or two and sitting on it through February.

Yours in Profit,

Gordon Lewis
Options Trading Research

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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