Strategic Mindset: Market Neutral with possibilities of Surges in Volatility.
Target: VXX trading at $21.05
Commit Criteria: The recent market turmoil has uncovered a large number of risks and exposed the markets to a significant drop. Over the next few weeks I don't expect many new issues to pop up, but we will need to be careful. I have left a fair amount of room for VXX to rise, but caution is still needed.
VXX Implied Volatility is overpriced relative to its forecast volatility of 15.06% over the trade period. We are looking for possible price movement but for it to stay within its $17.00 to $26.00 price range until the exit of this trade.
Tactic: Opening 20 VXX June 2012 Iron Condors (strikes [14/17/26/29]) for a $0.55 credit
Tactical Employment of Iron Condor:
- Buying to Open 20 VXX Jun 2012 $29.00 Calls
- Selling to Open 20 VXX Jun 2012 $26.00 Calls
- Selling to Open 20 VXX Jun 2012 $17.00 Puts
- Buying to Open 20 VXX Jun 2012 $14.00 Puts
- Net Credit: $55.00 per Iron Condor for a total of $1100.00
- Max Gain: $1100.00
- Max Risk: -$245.00 per Iron Condor for a total risk of -$4900.00
We will be watching for a price movement near the short strikes. As the short strikes are threatened we will adjust the Iron Condor as necessary.
We don't want trade expectancy dropping below 2.00%. Based on this we have two price targets at which we need to consider an adjustment. VXX trading below $17.95 and above $23.46 are triggers for adjustment.
We will wait for this Iron Condor to expire worthless taking the $1100.00 credit as profit.
Exit Tactic: We will wait for this Iron Condor to expire worthless, adjusting as necessary.
Disclosure: I am short VXX.
Additional disclosure: We are looking to enter this position in our Advanced Model Portfolio at Top Gun Options