Strategy: Buy VXX Puts < or = 20 trading days out (as close to 20 trading days as possible) around 4-6% out of the money strike price.
How Much? 1-2% of your Portfolio in general and NEVER more than 5%. Whatever you bet with these options you must be willing to lose 100% of it...So buyer beware!!
WHEN TO BUY? After (XIV) and (SVXY) have at least a 20% drawdown AND you are sure the market has bottomed and is going higher. The 20% draw is key because at lower % draws, unless you think VXX is going to rocket lower you will not get huge gains on this bet. If you don't get huge gains (2-4 baggers) then the risk is not worth the reward.
EXAMPLE RESULTS: Pretend VXX closed Friday at $48.51 (todays closing price). March 7th is 20 trading days from then so that is your Put Expiration date. $45 or $46 strike is about 5% out of the money. Top row is the % drawdown of VXX over the 4 weeks.
| VXX | $48.51 | ||||
| PUTS | 10% | 15% | 20% | 25% | |
| March 7th | $43.66 | $41.23 | $38.81 | $36.38 | |
| $43 | $1.25 | -153% | 41% | 235% | 429% |
| $44 | $1.63 | -79% | 70% | 219% | 367% |
| $45 | $2.12 | -37% | 78% | 192% | 306% |
| $46 | $2.61 | -10% | 83% | 176% | 268% |
| $47 | $3.10 | 8% | 86% | 164% | 243% |
| $48 | $3.63 | 20% | 86% | 153% | 220% |
| $49 | $4.45 | 20% | 75% | 129% | 184% |
| $50 | $5.03 | 26% | 74% | 123% | 171% |
Notice you can break even with an ~11% drawdown and you can make the big bucks with a 20-25% drawdown. That is why it is key to only buy this VXX put if you can nail the bottom within a few days AND you still have a 20% or more drawdown on XIV or SVXY. 20 days is plenty of time for SVXY to go back to its 52 week high on a 20-30% drawdown and inversely for VXX to go back to its 52 week low.
BUYER BEWARE! This is a very risky strategy and again you should only gamble with the money you are willing to lose 100% doing this trade.
I personally do NOT plan to use this trade if Fridays job number proves that Wednesday Feb 5th was the bottom for SVXY. It is unlikely that XIV and SVXY will be greater than 20% drawdown by the open tomorrow assuming Jobs Data is good. At Feb 6th close SVXY drawdown is 21.6%. If I had the guts to call the bottom on Wednesday or by the close today (Feb 6th) I would have used this strategy for 2% of my portfolio. I will wait until the big pullback comes sometime after Tax Day. :)
Disclosure: I am long SVXY.
Additional disclosure: 50% Long SVXY at time of this writing.