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Crazy ayzo

VXX open position

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Kim,

I was half way through reading all the VXX material on the site last week when the market went crazy.  

I bought 30 OTM put contracts last week when Volatility spiked.  It's only been a few days and I'm up nearly 100%... killer return for a few days.

My thesis when I was making the purchase was that the common wisdom expects the markets to stabilize after the midterm elections.  Following the template of your earnings call trades, I picked the expiration for two weeks plus a few days beyond the event.

If I'm right, and VXX returns to the high 20's... I make a fortune.  This trade seemed too easy.  I've read and re-read all the training this weekend.  Is there something about VXX options that I'm not grasping that's radically different than stock options?

 

Screen Shot 2018-11-04 at 10.18.06 AM.png

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    • By Kim
      VXX History
      Jill Malandrino, formerly of TheStreet.com writes it beautifully when she notes: 
       
      To see how often VIX futures are in contango, or more precisely, how often VXX falls, here is an all-time price chart for trading VXX options:
       


      Yep, the VXX is down 99.96% since inception. The reason is simply that VIX is almost always in contango. For the times that VIX falls out of contango, we can see abrupt pops in the VXX which we have highlighted in the image above. 
       
       
      The Incredible Option Trade In VXX
      in 2017, Ophir Gottlieb from CMLviz Trade Machine tested buying a put option spread in the VXX using the 90 day options over the last five-years. Here are the results of this VXX options trading strategy:  

        Tap Here to See the back-test
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      In fact, this strategy would be a winner every single year in 2010-2017.
      2018 was very different
      2018 was a very different year in many areas. In fact, 2018 was a first positive year for VXX since inception:



      We tested the same VXX strategy in 2018. Here are the results:
        


      Tap Here to See the back-test

      That's right, for the first time since 2010, this strategy would produce negative returns. Which is not surprising, considering VXX was up 73.5% in 2018.

      In fact, some periods in 2018 (specifically February and December) were so brutal that some funds blew up their clients account. The Spectacular Fall Of LJM Preservation And Growth describes one of those funds. Some of those funds were in business for over 20 years, but when volatility went through the roof in February, it was too much for them.
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      There are times where extreme volatility will give solid opportunity to short volatility unhedged, but it should always be done with a very small allocation.  Patience and experience is also key with regard to entering, adjusting and exiting positions.  In addition there are times where things get so out of touch with reality that the best course of action is to simply sit out for a bit and let the dust settle.  It is likely that the most successful volatility traders use a combination of discretionary and systematic strategies in their trading.

      Our PureVolatility portfolio (which is part of Creating Alpha service) produced double digit returns in 2018 during a first positive year for VXX since inception. Considering the overall market environment, this is an incredible performance.

      The Incredible Winning Trade In SVXY describes one example of how the strategy performed in February when VIX doubled in a single day. Overall this trade produced almost 45% gain on margin or 26% gain on $10,000 portfolio.

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    • By PaulCao
      Hi,
       
      I was doing some research on VXX and if you pull up any charts for any long-term, it's obvious to casual observers that VXX does not track VIX at all,
       
      http://www.seeitmarket.com/exposing-the-vxx-understanding-volatility-contango-and-time-decay/
       
      The issue is due to the fact that VXX doesn't track VIX, but rather tracks a 30-day rolling window of a near month VIX future and a back month VIX future,
       
      http://www.ipathetn.com/us/product/VXX/#/dollarweights
       
      In the case when VIX future's are trading in contango, e.g., the near month VIX future is less than back month VIX future, VXX fund manager everyday is selling his cheaper VIX future in exchange for more expensive VIX future for a loss,
       
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      In this scenario, given that VIX is in contango, VXX should be performing worse than VIX (and vice versa if VIX was trading in backwardation).
       
      I plan to make a test trade to trade out this idea: 
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      Has anyone done this before; or are knowledgable about VIX, please comment. I'll report back with performance,
       
      Best,
      PC
    • By Marco
      for those who trade VIX - be it though futures, options or ETP's (VXX,XIV,ZIV and the like).
      I came across a paper that I found very interesting - well I only glanced over it for now and read a few things in more detail, but it looks very interesting so far.
      Trading VIX related strategies is slightly more complicated in my opinion that 'normal' option strategies, so if you are new to options and still get your head around delta,gamma,theta keep this for later and certainly venture into this area slowly and carefully. Having said this I think this is written not overly complicated and you don't need a degree in maths to understand it.
       
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