Strategic Mindset: Market Neutral with possibilities of Surges in Volatility.
Target: VXX trading @ $15.42
Commit Criteria: This is a new trade on VXX. We are doubling down on this big shift.
The market surged today and VXX dropped significantly. I still feel like it is unlikely VXX is very unlikely to drop below 15, especially given the current chaotic market conditions. VXX Implied Volatility is overpriced relative to its forecast volatility of 15.87% over the trade period. We are looking for possible price movement but for it to stay above $14.66 until the exit of this trade. Note, we are break even or better as long as the VXX stays above $14.66.
NOTE - The $50 strike Calls in the spreadsheet analysis are just dummy values to make the spreadsheet work. They are not part of the trade.
Tactic: Opening 50 VXX July 2012 Bull Put Spreads (strikes [14/15]) for a $0.44 credit
Tactical Employment of Bull Put Spread: - Selling to Open 50 VXX Jul 2012 $15.00 Puts
- Buying to Open 50 VXX Jul 2012 $14.00 Puts
- Net Credit: $44.00 per Bull Put Spread for a total of $2200.00
- Max Gain: $2200.00
- Max Risk: -$56.00 per Bull Put Spread for a total risk of -$2800.00
Mid-Course Guidance: We will be watching for a price movement below the short 15 strike. We are actually safe on this trade down to $14.66 but if the short strike is threatened we will adjust the Bull Put Spread as necessary.
Profitability Target: We will wait for this Bull Put Spread to expire worthless taking the $2200.00 credit as profit. If the VXX surges up in the near term we may choose to close this trade early, taking a smaller, but faster profit.
Exit Tactic: We will wait for this Bull Put Spread 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