Tag Archives | VXX

Trading Options for Special Situations


A service that one of my friends is following is promoting so called
“Special situation” trades. The three criteria that all Special
Situations have in common is where a temporary market imbalance creates a
scenario where:

A) It would be extremely improbable for us to lose money
B) The return on investment is unusually high
C) A credit spread is determined to be the best vehicle for the trade


1) FAZ has been trading in an up-and-down range from 13 to 18 for the
past three and a half months. To get below 13.00 things have to be
REALLY BULLISH in the financial sector. To take advantage of this
imbalance, he is proposing selling the FAZ Oct 13/12 put spread for about 40
cents, or 68% potential profit.

2) SDS has been reversing right around the 31.00 level for the past four
months. The trade would be to sell SDS Oct 30/29 put spread for
about 34 cents or 51% potential profit.

3) VXX is likely to go up because it's near a significant low and
there's a lot in the coming months for the market to digest. The trade would
be to sell VXX Oct bull 19/18 put spread for 47 cents or 90% potential
profit. [NOTE: 47 cents on 53 cents margin MDW]

4) TBT will go up because it's at the low end of a range and interest
rates just can't go lower. The trade would be to sell TBT Dec 30/29 put spread for 35 cents, or 55% potential profit.

What do you think about this strategy in general?



Hi Kim,

In general, the strategies are fine.  IF YOU WANT TO MAKE DIRECTIONAL PLAYS BASED ON THE INFORMATION PROVIDED, then go for it.   That's the key.  Do you have confidence in the market predictions implied by these trades?  I have no reason to tell you that this service is good or bad, but…

The scenario sounds good.  My only concern is that A) and C) are obviously based on opinion. Thus, you must trust the service's opinion.

1) The FAZ spread: Remember this is a triple weighted ETF, and those come with a built in tendency to trade lower as time passes.  Before jumping into this trade, take a look at the corresponding ETF – i.e., the one that is NOT triple weighted.

The return is excellent.  If you want to take this bet, then it's a good trade.  Recognize that the 13 put is not too far OTM, and my concern is:  What's the trade plan?  Hold to the end (not unreasonable here)?  If not, when would you adjust, and what is the probability of reaching that adjustment price?

2) I don't get this services fascination with leveraged ETFs.

To me, this is NOT a special situation.  It's a market bet based on recent price history.  I'd ask the service: "What makes this a special situation, other than your opinion that it's special?"  The same can be asked for the FAZ spread.

3) VXX is near a recent low?  Based on what?  This is a new product without much history.  Likely to go up?  Who says so?

Look at the chart in the upper 50s.  Couldn't the same argument have been made at that price level?

Kim, these are just a market timer's opinions.  I would want to know if he/she has a good track record before placing bets on his/her opinion.  I see nothing special about any of these trades.  Note: I am not a technical analyst and if you want to bet on chart reading, I wish you well.  I cannot provide any help there – because I do not pay attention to charts.

4) 'Can't get any lower'  Listen to yourself.  Who says it can't?  I have no opinion, but beware of people who tell you this or that cannot possibly occur.  Don't ignore Keynes: "Markets can remain irrational longer than you can remain solvent."

There is no outlandish danger here – other than a) making a market bet based on someone's chart reading, and b) a huge decline.




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As a sincere thank you to subscribers, Expiring Monthly: The Option Traders Journal is running a contest and offering a valuable prize to  one lucky subscriber. 

Non-subscribers also are encouraged to enter.  Your entries will be separated from those of subscribers, and the winner receives a one-year paid subscription to Expiring Monthly.

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Entry deadline: Midnight (CT) Saturday, Jul 3, 2010

Prizes awarded to the subscriber and non-subscriber whose entries are nearest to the closing price of VXX on July 16, 2010.  In case of ties, the earliest entry wins. 

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A little information about VXX

The iPath S&P 500
VIX Short-Term Futures ETN
, VXX began trading Jan 9, 2009. As Bill Luby reports at VIX and More, this product was a hit from its first day, and trading volume has been expanding steadily. The unfortunate news is that most who bought this vehicle (as a long-term investment) were far too early.  VXX declined steadily from the beginning.  Until one day, it reversed direction

Weekly chart of VXX, since inception (StockCharts.com)

is not designed for investors.  It's a short-term trading vehicle because
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iPath, the company that manages VXX, tries to explain the important details.  The sad fact is that too many individual traders buy and sell this item without understanding what they are trading. That's nothing new, as it has been a way of life for VIX option traders. (VIX options DO NOT track the daily VIX  -  they are options on VIX futures contracts.

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