Trade Update: Shorting VXX Calls

A few weeks ago, I wrote about a strategy that consisted of selling short out-of-the-money VXX calls. Before I was willing to short the calls, I wanted the IV on the VXX to be near all time highs and I also wanted there to be a pullback in the SPY. Both of those occurred today, therefore, I shorted the September $50 VXX calls. In this blog post, I will explain why I like this trade so much and how this strategy is much better than any other bullish strategy.


By selling options when the IV is high you have a big advantage. The reason is that the options are pricing in such a huge move that for the options to continue to gain in value, you need the underlying stock/ETF to have dramatic moves. More specifically, when the VXX has an IV that is almost at its year-high, it indicates that fear is at the highest level in almost a whole year. In turn, the calls, and more specifically, the OTM calls are very expensive because people are panicking.

As a VIX/VXX seller, you have to consider a few things. First, why is the market selling off? Second, what is your risk/reward on the trade? And lastly, how much more can the VIX rise before you feel that it will hit a top? The answer to all three of those questions at the current state of the market makes the short VXX trade very smart:

  • First off, the reason the market is selling off is because of geo-political concerns. This is the best kind of sell-off because it always creates a fantastic buying opportunity. Every geo-political sell-off has been bought, as fears usually subside quite soon.
  • Second, the risk/reward is very favorable because the options are priced very high and are extremely out of the money. To give you a better idea of the trade, I shorted the September 50 VXX calls @$1.00. The delta on the option is right now at $.18 and the Vega on the option is at $.03. The IV is at 80 and the average IV of the last year is at 60. This means that on any bounce (1-2%) in the market (SPY), the IV of the VXX should trade back down to 60 and the VXX should give back at least 5-10%. This would translate to a $.60 loss in the option due to the Vega and also a $.20 loss (at least) due to the Delta, making this trade on just one bounce over an 80% gain. Looking at my risk, the last few sell-offs in the SPY has lead to an average return in the VXX (during the correction) of around 40%.
  • Lastly, the low on the VXX is 27.5, meaning that a 40% pop would lead to the VXX printing $40, still over 20% below my strike. What makes this even better is that the 40% pop has come on sell-offs of around 7%; this means that even if we were to get a 10% correction, it is still unlikely that it would touch my strike price. Even if it did touch my strike price, by the time it did, there would be a lot of money that would come into the market if we saw a 10% correction; this would result in major losses for the VXX at that point. All in all, I think the $50 strike is far enough away that it is safe to be a naked seller.

The reason I say that this is the best bullish strategy out there is because if you were to buy SPY calls, you would make very little, if anything, on a bounce; this is because the IV decline would destroy any gains. And it would not make sense to sell a put spread, because it seems as though there is still a little more downside in the SPY.


I will post another trade update when I close out the position, and reflect on how successful the strategy was.


Max Ganik (Maxzak) is a 19-year-old stock and option trader. As of June 2016, Max has been a member of Option Millionaires for over 3 years, and has been a contributor for over 2 years. Max regularly writes blogs for Option Millionaires and has also presented webinars.

Max is the founder of Ganik Market Strategies. He is a member of the Leaders Investment Club. Max has been interviewed by the New York Times, CNBC, and Bloomberg TV. He was also the first high school member of the New York Society of Security Analysts. Max is currently a member of the University of Michigan's premier investment club, Michigan Interactive Investments.

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