VXX Iron Condor Based on 2013 Price Action

As we are entering what can be a volatile time of year I decided to ask Russell Rhoads over at the Options Institute what VXX may do if VIX spikes up in September or October.  Russell, being the market historian he is, pointed out that standard October expiration is 26 trading days out.   In 2013 the biggest 26 day move to the upside for VXX has been a rise of 22%.  He also pointed out that the average 26 day move for VXX in 2013 has been a drop of about 8.5%.  There have been bigger VXX drops over this time period, but those came after an initial run up. A 22% rally from current VXX levels would put the ETN just under 18.00 and a drop of 8.5% would result in VXX trading over 13.00.  I started looking at the standard October VXX options and based on these numbers an iron condor materialized.  With a good chance that VXX will be in this 13 to 18 range at October expiration I came up with an iron condor based on the following trades (this pricing is based on closing quotes today) –

Buy 1 VXX Oct 11 Put @ 0.02 + Sell 1 VXX Oct 13 Put @ 0.32 + Sell 1 VXX Oct 18 Call @ 0.37 + Buy 1 VXX Oct 20 Call @ 0.22 for a net credit of 0.45.

As long as VIX and VXX continue to behave as it has in 2013 all the options should expire with no value.  An outlier move for VXX relative to what has been the norm in 2013 could result in a loss of 1.55.  The risk for this trade is definitely to the upside as VXX moves quicker to the upside than the drift lower.   If that happens I might consider rolling the short 13 Put to the 14 or even the 15 strike price.  A bigger move to the upside and I would probably consider adding a bull call spread.  This again depends on the extent of the rally and how much time is left until October expiration.  However, since VIX (and VXX) rallies have been fleeting this year I would be inclined to use a move higher in VXX to shift over to having a net short bias.

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One Comment
Dan Sheridan

sheridanmentoring.com

Dan Sheridan is a 22-year CBOE veteran who worked with the highly successful specialist firm Mercury trading, which was headed up by Jon and Pete Najarian. While at Mercury Trading, Dan was responsible for training most of the traders including Pete Najarian, one of the current hosts of CNBC's Fast Money. Dan has been teaching…

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    good luck with that…!!

    going into the most volatile period in a generation, thinking that “nothing will change” is lunacy…