Assuming if it skyrockets to 75, what if it skyrockets to 155 or 255? When it spikes up, it can spike up A LOT even if it comes back down afterwards. It's done that before, quite a few times. You could be margin called just for that spike and you might not have enough capital to ride the downtrend afterwards. That's why I suggest you either trade with a spread or hedge with the underlying so it's covered.
I am confused. How can you wait for volatility to collapse? Options on VXX are American not European, so if VXX goes parabolic, the other side will immediately exercise the call and you are forced to go into the market and buy VXX at the exact parabolic top, to deliver to him. Are you trying to say after that, you will then short VXX at the exact parabolic top? You won't make enough on the short to cover the huge loss on the naked calls, unless you are taking on much larger size which I doubt you have the capital for at that point.
Can it skyrocket to 75 and then 155 or 255, yes absolutely but the most black swan event in history would have to occur for this to happen. In fact I could almost guarantee you that a 155 or an insane 255 vxx would actually shut down markets, we are talking about a drop that would literally have the masses in awe, a drop so gigantic that markets would be closed until the fed stepped in and by that point knowing the fed would do absolutely anything to prop up stocks, volatility would collapse that same exact moment they open up their mouth and come out with some out of the ordinary idea to alleviate any selling pressures in the market. Look at feb March 2020, vix spikes and within days it was right back down. If the largest pandemic in history can keep volatility afloat for at least a few months nothing can....
I am talking about how much you can lose when the market goes down in a margin call due to a margin call. How far a market can go down before somebody does or does not do something to help it recover is irrelevant. Your money is already gone!! So when the market recovers, you might not have anything left to trade. That's the biggest risk when you short naked call or short volatility instruments naked. Anyway go short naked calls and you will find out yourself...
Do you know what happened after the markets started dropping 2 weeks ago?? Within minutes of economic data and stocks falling 4% 5% 6% 7%? The panic immediately set in and within a minutes nearly every single media outlet and talking fool was touting over an 80% chance of a 50 basis point cut in September.... The panic and fear set off this idea that all of the sudden a selloff in equities warranted a 50 basis point cut in fed funds rate.....are you kidding me?? That's how frightening this market is, that just a simple 4 or 5% drop in stocks creates unimaginable fear. Thats the market environment we now live in....quite pathetic
Until further notice this is still a bull market so it makes sense to sell all VIX >30 rips. The only sustained VIX>30 was in the GFC & Covid. If you faded the GFC VIX spikes you would have been destroyed since it lasted almost 9 months. Even the infamous Volmageddon (Feb 2018) VIX spike lasted less than 2 weeks (it only closed above 30 for 7 straight days 2/5/18-2/13/18).
That's what I'm saying. There is never a continous trend of higher vix ...it shoots up and then completely levels off every single time. The fed would never allow a fear index of 30 plus on the vix. That would cause havoc in the markets All I keep saying is markets can stay completely overbought for years but a day or 3 of selling and within hours a market is said to be oversold. Looking to sell a call on vxx for next Friday, probably the 55 depending on the mid day market set up.
Very interesting discussion. These spikes beg to be traded, only question is from which side. Barclays Bank's US Equity Derivatives desk certainly has a strategy and they wrote a nice neat paper about this "Barclays US Equity Derivatives Strategy Impact of Retail Options Trading", as well there is a short video about it here:
Sold a VXX call @ 54 expiring next Friday! I'll be sleeping peacefully collecting that free money on this one!
If you want a really useful answer its best to take it from a pro. Here Dr. Seth Freudberg, who is boss of the SMB Capital's options desk, breaks down recent selloff cause by unexpected 2.Aug.2024US Unemployment report.