What's This VXX Trade Telling Us?

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Hi, My name is Steve and I‘m with Options

Trading Research, today were reviewing

our recently published article…

What's This VXX Trade Telling Us?

There are good reasons why trading

iPath S&P 500 VIX Short-Term Futures

ETN $VXX is extremely popular. With an

average volume of nearly 50 million

shares a day, both retail and institutional

traders must be active in this ETN.

As a quick 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.

Volatility has finally settled down the last

month after trading at elevated levels for

a time. As such, VXX is back down to

near 52-week lows.

At $25.06, $VXX is down about 20% on

the year. That’s just 2% above the 52-

week low and 46% from the 52-week

high.

So what's the deal with this VXX trade?

Here’s the deal…

A trader sold over 6,000 May 30 calls in

VXX for around $0.80 per option. That

works out to a little under $500,000 the

trader collected in premium.

That's also the max gain on the trade. If

VXX closes below $30 on May expiration,

the trader gets to keep all the premium.

Otherwise, the breakeven point is $30.80.

The loss is unlimited if VXX shoots

higher, so there's certainly some risk.

However, the VXX rarely remains

elevated above $30 for any length of time.

Check out the chart:

As you can see, VXX doesn't tend to stay

elevated above $30 after upward spikes.

After trading at higher than usual levels

early in the year, it's now dropped to

nearly 52-week lows.

So, should you make a VXX trade like

this?

VXX closing below $30 on May expiration

has very high likelihood of occurring.

Extreme contango in the VIX futures is

also helping to ensure the VXX is going

to continue its descent.

However, I don't recommend selling

naked calls unless you're a very

advanced trader. It's a very risky

proposition due to the unlimited loss

potential. More conservative traders can

instead consider buying VXX puts.

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