As of mid-day Friday, the market looked like it was not going to fall apart, but who knows what's going to happen this "Greekend" as the Greek elections loom.
Around 1:45 eastern time, The iPath Short-Term VIX ETN (VXX) was trading at 19.02. I suspect it could rise dramatically next Monday if the markets fall apart. On the other hand, central banks supposedly stand ready to do whatever "needs to be done."
You could always buy VXX in anticipation of a short-term spike, but an options structure is a good way to limit your risk. So here's a suggested hypothetical trade you might have considered instead - using the June 22 weekly options.
With VXX at 19.02, you could have executed the following trade:
- Sold the June 22 19-strike put for 1.03
- Bought the June 22 17-strike put for 27 cents
- Bought the June 22 20-strike call for 72 cents
That's a net credit of 4 cents, but given commissions, let's assume it's a net credit of zero for 10 contracts.
Your maximum reward is unlimited and your maximum risk is $2000 ($200 per contract) if the VXX falls.
A three-way spread
This is a three legged spread, which is a bit unusual but offers a favorable risk/reward on Monday if volatility does spike. This chart shows the expected profit for this position on Monday and at expiration
Note that while the maximum risk is $2,000, Monday would probably offer the opportunity to exist the position at a smaller loss even VXX drops significantly (but keep in mind that a drop in the implied volatility of the VXX would work against you). And if VXX soars, say back to 21 or 22, you could possibly make $1,000 to $2,000.
I don't have a current VXX position one way or the other, and this article will probably appear too late to be anyone's real trade.
However, studying how a trade like this might work could help you discover new ways to manage risk and reward. Unlike buying VXX itself, this provides a payout structure that limits losses while maintaining a high upside.
We'll see how this hypothetical trading idea would have worked out on Monday morning. Have a great weekend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
