VXX - a trending stock

Discussion in 'Options' started by samer1, Nov 3, 2012.

  1. Here is a VXX trading idea:

    1. Wait for a VXX spike (even a minor one)
    2. Enter a monthly credit call (or debit put) spread that have risk:reward ratio < 1 (e.g. if VXX is @36, sell 32/36 call spread).
    3. If VXX spikes in the next following days, roll the spread higher while increasing it's size (the initial size should be 1/3rd of the projected max size). Repeat up to 2 times.
    4. Once VXX starts drifting lower and position shows 30-50% profit, start reducing it. Alternatively, you may sell VIX (sic!) puts if VIX goes to 15-16 area. This will create a synthetic iron condor.
    5. If the spike continues and all 3rds are in, roll to the next month, same or higher strikes after a week is left till expiration.
    6. Keep repeating step 5 until spike is over (should not last more than a month anyhow).

    I did steps 1-4 during the last spike reducing my position to the original 1/3rd on last Friday. My current position is 30/34 credit spread with possible loss smaller than the profits I took when VXX came down. Technically it is risk-free at this point.
     
    #21     Nov 4, 2012
  2. samer1

    samer1

    I have created a backtesting tool for option strategies in Excel. I use the historical volatility as an input (instead of implied volatility). The tool can use up to four option positions.

    Enclosed you will find the return of the following strategy:

    Maturity: 1-month
    Every monday, you sell a call option with strike at one standard deviation OTM. You also buy a call option with strike at two standard deviations.

    Hold this position until the end.
     
    #22     Nov 5, 2012
  3. samer1

    samer1

    Backtested strategy:

    Each monday do the following:

    1. Sell an ATM call option with a maturity of one month.

    2. Buy an OTM call option (1 std. dev.) with a maturity of two months.

    Close the position, once the ATM call option expires.
     
    #23     Nov 5, 2012
  4. What's your position size relative to the account size?
    You should've used historical option prices for this backtest
     
    #24     Nov 5, 2012
  5. Jgills

    Jgills

    i think the first thing you should do is rebuild vxx to understand the negative drift
     
    #25     Nov 5, 2012
  6. samer1

    samer1

    It is one hundred percent. So if you short a call, and it expires worthless, your account increases by 100%. The number is misleading. Hence, one should divide the performance number by 100 to have some realistic result.

    I do not have access to option prices. If I had access, I would have used the real option prices instead. Hence, I calculated option prices on my own, using historical volatility. I konw this is somehow flawed. however, it might give you a hint what is working...
     
    #26     Nov 5, 2012
  7. TOS has free end-of-day historical option quotes. It should be enough for this type of backtest.
     
    #27     Nov 5, 2012