If the VIX is at 10, I am short VXX, say 100 shares, at 10, and long one VXX call at the money call, expiring in five days, what is my overnight risk?
Your principal risk is if you haven't got a good understanding of the mechanics of VXX and the VX term structure and are likely to be surprised by their behaviour in a less benign volatility environment than we've seen in recent months. I'm not sure if the fact that you quote VIX at 10 and a VXX price at 10 means you believe these numbers are related, which they're not. Given VXX is composed of a weighted mix of first and second month VX futures, the simple answer to your question is that if there's an event outside of VXX trading hours that increases financial markets volatility or anticipated volatility, it will be reflected in a rise in VX futures (which trade almost 24 hours). The front month maturity will almost certainly rise more than the second month. When VXX reopens for trading, its price will adjust to reflect the change in price of the fund's constituent futures. The balance of first and second month futures held by the fund depends on the proximity of the date front month expiry (this info is published each day on the issuer's website). The extent to which VXX price rises in response to futures pricing is related to this. The spot VIX price has no direct effect on VXX. There are numerous overnight risks: a market plunge in China, North Korea, Trump revelations......all will be reflected near-instaneously in the VX futures, and subsequently in the VXX pre-market price. Or are you asking what your $ overnight risk is? Presumably you can look back at sample VXX price spikes and use an options calculator to estimate these scenarios. (bear in mind that if VXX has been typically drifting down for four days then your ATM call hedge is no longer ATM)
Ok what happen pre-market if there is a black swan event. Is there a period where VXX could spike but the calls haven't opened yet. Thanks for the VIX, btw, but I suspect this my be more of a hedging question on a short VXX position.
That's a good point, and I suspect that there is such a period but can't find any immediate verification of trading hours. I was going to add in my prior post that one overnight risk is a margin call/liquidation based on this type of scenario, but I don't have knowledge of how different brokers handle these.
Overnight or RTH, something of that magnitude could threaten the operations of the fund, especially as it's an ETN. Worth knowing the risk factors in the prospectus.