A couple of weeks ago, I gave a trade update on my short VXX trade. My trade was to short the VXX calls in anticipation that geopolitical fear would recede and that the market would bounce back. I was correct; since my trade, the VIX/VXX has tanked and the market is back in rally mode. I closed out the short calls for a 65% gain. I hope that this trade shows you a couple things.
First, do not be afraid to be a contrarian. When many people are calling for big corrections or crashes, you can take advantage of that fear.
Second, trading options takes a lot of guts; if you want to be successful, you have to think outside the box. Using the option greeks, you can find long and short option trades to take advantage of every market climate. For example, when the IV on the VXX is very high (after a market pullback), both puts and calls are very expensive. If you wanted to bet on a rebound in the market (sell-off in the VXX), you would need a big move down to compensate for a significant drop in the IV. Where as, shorting calls is a win-win situation. If the VXX falls, you make money because your short calls will fall in price, but also, the IV decline will be even more beneficial for you as you are short those calls.
Where do I see the VXX going over the next few months/years? My long-term target on the VXX is $1. Yes $1 (split un-adjusted). You will never see it at $1 because of the reverse splits. The VXX will continue to fall basically forever because of contango. Contango is when the future dated VIX contracts are more costly than the shorter dated contracts. Therefore, the VXX is constantly buying those longer-term contracts, which means that without any significant rise in the VIX, the VXX will continually lose money, as those future contracts will slowly come down to the spot price. As a rule of thumb, I never go long VXX because to bet for upside in the VXX is a fight I do not want to have. In the short term, I think the VXX continues to fall into year-end as I expect a rally in the SPY through year-end. There will be bumps along the road, but I think the S&P 500 ends above 2000 on the year, unless the Fed gives us a hint that they will raise rates sooner than expected, which is something that I do not expect.
— Max Ganik (@MaxGanik) August 5, 2014
OUT of short VXX September 50 call @$.35 from $1.00. 65% gain
— Max Ganik (@MaxGanik) August 13, 2014