options trading strategies

What VXXB Options Strategy I Am Trading In 2019

Goodbye VXX, hello VXXB. It has been an exciting ride with VXX in the last few years since I discovered how to trade VIX.

After writing this post about if VIX would go up or down in December 2018, then VIX spiked up and up all the way to January 2019. This has really opened my eyes as to how much we should rely on historical data. The influence of political and economic factors on the stock market is just unpredictable. Some of the VIX traders I was following at the time got it completely wrong in terms of predicting VIX direction and it was a real wake up call for me to “listen to what people say, decide what to do on my own”.

Last year, I also discussed selling VXX PUT to benefit from time decay even if there is contango effect. I have been experimenting this recently so let me share what I have done so far later in this post.

First, I want to add a bit more data that could be useful in executing this strategy. I came across to this data set while looking for VIX contango historical data. The file I got contained contango data from March 2004 to March 2017. What I did was to calculate the historical average contango (and backwardation) % for each month (table below).

The average contango value for the entire time period was 5%, which actually is the number I used to color code the table. >5% in red (not good), <5% in green (good).



Just to remind you, what we want for this strategy is to have low contango, because we want the time value to decay faster than cantango effect, so we could take a profit from time decay even if VIX does not jump up.

Obviously, there were more months that had “more than 5% contango” (88 months) than months that had “less than 5% contango” (69 months). This data consolidates why it makes sense to short VIX (or VXXB and UVXY) because it’s in contango most of the time. However, this also means the strategy I want to execute might not be such a good strategy after all.

The counter argument to this is, we will not hold the option until expiration, because we will get out of the position when VIX spikes. What we are doing here is to anticipate the worst case scenario, in which if VIX does not spike until option expiration, we want to at least have the time value covering the negative contango effect.

Historical contango and backwardation 2004 to 2017

Larger or Smaller than 5%Count%
>5%8856%
<5%6944%
Total157100%

22/24 VXX Put Credit Spread, Exp 21 June 2019

I opened three 22/24 VXX PUT CREDIT SPREAD positions over the period of a week at different price points (April 3, 8, 12). As of now (April 23, 2019), VXXB is at around 25 so the cumulative position is pretty negative. The break even point today is at around 27 (image below).

TOS also predicts there is only 43% chance it would be above break even.

There are still 59 days to expiration so time value may not catch up to the contango effect. In fact, contango is at around 8% today and if it continues to at this pace, the cumulative average could be larger than the 5% we used for calculation. In other words, this is not good……

Looks like everything is against me at this point. Well only time can tell. All we need is a one good spike or maybe even a bit of backwardation in the next several weeks. Let’s see what happens.

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