What do you mean? Given the trade parameters, if VIX futures close above 16 on Dec 22, then the trade will work since it had an initial credit. Otherwise, it may or may not work depending on where VIX will be relative to VXX on that day.
your trying to mitigate your risk will selling a vix put with contango decay in the vxx.. your basically expressing a view that at some point in the non linear lifetime of this trade.. contango in the vxx or actual vol will put your in profit.. sounds good on paper.. have you quantified how much roll cost there is in the vxx "generally" and how undervalued it might make the put? i've thought they were often undervalued.. but figured it would be to obvious. do you have any idea what the cost of going long a vxx put is really compared to going short a vix put? not the actual credit.. but your theoretical view considering roll cost against theta.. the vxx options seem messy because of the unpredictable roll cost associated with the underlying.. vxx options are literally.. a derivative of a derivative of a derivative.. first order. vix futures.. second order vxx "how many shares are you going long by selling that put, AND WHAT IS THAT WEIGHTED AGAINST YOUR BOUGHT PUT" third order vxx options.. options on etf on futures.. how to figure roll cost parameter into pricing ? alot of these are just statements.. not necessarily true.. things i've thought to be true..
My rational for this trade is very simple: 1) VXX is designed to lose value over time. Just look at the chart since inception. This means it is a perfect short in a long term. However, it may spike in a short term. Hence... 2) Any short position in VXX must be a) entered during such spike and b) hedged against further spike(s). 3) This objective can be achieved by buying VXX puts during a spike. So far so good but they have plenty of time value built in them. How to hedge it? Sell puts at the lower strikes? That's one way of doing this. However, I believe there is a better way... 4) VIX short put can be used as a hedge against VXX long put and it is better than VXX short put because VIX has a "floor" around 14 while VXX does not. Of course, VIX put must be sold at a strike close to 14. The whole position may be viewed as a synthetic calendar or diagonal spread.
that you just stated was all understood... i understand the position your taking.. but its just hard to quantify what your actually holding in both positions respectively..
That's true. Most modeling goes out of the window if we're dealing with VIX options. However, I think I can quantify an expiration scenario to some extent. My break-even on VIX is 14.90 (16-1.10). It is unlikely for VIX to go below 14 and stay there. But let's assume it goes to 13.90 (8% down from today) thus making me a loss of $1 per contract (or $2 per combo). VXX in this case would go to $27 (8% down from today's price) making my 31 put worth at least $4 (gain of 2.1). So overall position would gain .1/combo.
vix expires dec 18th vxx expires dec 21st vix ATM right now is 15 strike put is .75 vxx 29 striked atm put is 1.70 your taking a view on term structure.. and if you actually have a view their are more profitable ways to do that.. no credit possible
My numbers are from yesterday. Today you have to alter the contract ratio from 2:1 to something like 170:75
Rocky, thanks for sharing this idea with us. I totally agree with you that VXX is totally sexy. What I like about VXX is its trendiness. It is in a permanent downtrend. Now to your idea: Your idea about VXX and VIX is interesting but very complex. An alternative might be the pair VXX and SPY: If you want to buy a put on VXX, you might sell calls on SPY to hedge. The idea is to be short VXX and short SPY in a specific ratio. There are many possibilities: A call back-spread on VXX in combination with a put back-spread on SPY... Let me know what you think... Actually, I am considering opening a new thread on the VXX-SPY topic... Thanks!