The Chart of the Day - Revisited
Before I left for the holiday I wrote about an opportunity that I typically like to take advantage of as a trader.
VXX had peaked about 10 days prior to the holiday break before falling off a cliff. As a result, the volatility ETF has pushed into a short-term oversold extreme with an exceptionally low RSI (2) of 0.2. Moreover, the gap from 8/18 closed.
Couple extreme oversold conditions with the close of a four month gap and the probability of a short-term bounce increased dramatically.
I proposed to everyone the following three questions on how you, the reader, could take advantage of the scenario. The response was overwhelming.
1. I could buy the ETF outright for $33.76. Buying the ETF outright gives you duration, but this is a short-term swing trade, so should duration really be a factor? Buying VXX would require a large capital outlay and the statistical chance of success is only 50%.
2. I could buy a call. My capital outlay would be far less than that of the underlying and my risk-would be defined by the premium I paid for the call. But, time decay would be working against me and the statistical chance of success is basically the same as buying the underlying outright.
3. I could sell a credit spread, namely a bull put spread. Unlike the first two choices, by selling a credit spread I am able to create my own probability of success while at the same time defining my risk. Moreover, selling a bull put spread allows for a margin of error. As long as VXX closes above, say the 28 strike (see trade below) the trade is profitable.
Let's see how each scenario has played out.
1. If I bought the ETF outright I would have lost a paltry $0.07, or 0.2%.
2. If I bought the at-the-money call at the 34 strike at the lowest price (being generous) on 12/21 for $2.40 I would be down $0.48 or 20.0%.
3. If I sold the credit spread (as I did in my Options Advantage service on 12/21) I would be up 2.8% on the trade because $0.05 has been sucked out of the $0.25 I sold the spread for back on 12/21. AS long as VXX closes above the 29 strike the spread will reap 14.3%.
So far #3 is the best choice. If you were able to get out of VXX before the long holiday weekend you could have made a small return, but you needed to be nimble. With a credit spread time is on your side. Selling a 29/27 bull put spread allows for a margin of error, just in case the trade does move against you or you are unable to be nimble enough to get out of the trade for a small return.
Email me at optionsadvantage@wyattresearch.com with your insights.
Andy Crowder
Editor and Chief Options Strategist
Options Advantage
