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VXX post-mortem

This is one of those trades that happened so fast I never did any pre or post-analysis until now. I wasn't sitting around waiting or even anticipating that VIX would spike up. I just happened to be watching on Wednesday when the panic hit. I was already in a position with short 48 strike calls on VXX for APR expiration that I sold for .46. At the time that trade was put on VIX was at 25 and VXX was 35, so this was meant to be an income play but I'd be more than willing to stay short volatility if I inherited a short position up there. Now, because I already happened to be short those calls, when the spike in vol happened I noticed my marked-to-market position on VXX was way upside down, like by more than $-2,000 on just 10 contracts. I thought this couldn't be right since VXX was at 38, I was still $10 OTM!! So I bring up the option chain to confirm what is going on and see what looks like free money.

The IV of VXX had shot up over 100% and the skew was crazy. The IV was going up higher and higher for the farther out strike prices. Normally I'm a proponent of assuming that options are efficiently priced, but take a look at the screen shot I made of theoretical price versus the price trades were going through at. I thought this was insane so I decided to double up on my short position of another 10 call contracts, pucker up and hope the world doesn't go truly insane. I was definitely nervous of what was on the news and why VIX was spiking so hard, but at this price I would be at a cost average of over 50 on VXX, the 49 calls were the farthest available strike price offered for trading, I'll take that risk. I was not assuming or even guessing that the VIX wouldn't or couldn't go higher. I just felt like I was panicking a bit and I wasn't even long stock, so I've been around a while and felt that feeling enough times that I felt comfortable that the logical play was to try and sell some fear, even though I admit I was feeling some myself. T

It turns out I got lucky and things didn't get worse. I was able to close this trade out for 72% of the max profit in just two days. I felt like taking the gains and leaving myself the margin availability to jump on a similar trade again in the next week if it appears. This post isn't to say look at me I make a quick kill, it's to show you what I was seeing in case you come across it yourself. The options market was not pricing in risk efficiently and as a trader that is something we should be taking advantage of. As long as you're not using a position size that can hurt you, your risk here is that VIX goes above 40, VXX above 50, and never comes back down. That's not a logical assumption.

I didn't pull the trigger until I had reason to believe we peaked.

Take a look at the increasing IV of the calls

Theoretical price vs trade price. The purple line is Theoretical Value, the white and red boxes are the prices trades are going through at for the 49 strike calls. The green boxes are my entry and exit points. Notice that I received far more than theo price for selling but only paid a few pennies more than theo price to buy back. This concept in isolation is an example of a good trade, the fact that I got lucky with timing is not what makes the trade good.






E-mail: JasonAndrewHaas@aol.com

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