Using A Weekly Options Strategy On The IPath S&P Short-Term Futures - VXX

Includes: GLD, VXX
by: Kevin M. O'Brien

Early last week, I wrote an article about generating weekly profits with stagnant stocks or ETFs using a 'long put butterfly' spread here on Seeking Alpha. You can read that article here.

For this week, I would like to write about a strategy using a 'reverse iron condor' spread with the iPath S&P Short-Term Futures (NYSEARCA:VXX). Through back-testing, the weekly results on this trade are quite remarkable, which I will outline in this article.

The iPath S&P Short-Term Futures seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

It is important to note that this investment is completely different than the CBOE Volatility Index (VIX) in the way that it trades. This VXX is a daily, short-term volatility trade.

The 'reverse iron condor' is a neutral options strategy that is placed with a net debit instead of a net credit to the buyer and can be placed with a lower level trading account. Most brokers will let you place this trade if you are approved with a Level 2 or Level 3. Please check with your broker, and if not approved, you can also request to be upgraded. This trade is a limited risk, limited profit strategy.

A few weeks ago, I wrote an article on this strategy, which you can read here, and how to use it effectively with the SPDR Gold Trust (NYSEARCA:GLD). This trade is also very consistent and it is very manageable if the trade is working against you. My recommendation is to place this trade on a Thursday morning, before the next week's Friday expiration. This allows you to have a full seven trading days, with the exception of when there is a holiday or the markets are closed.

Here is how the 'reverse iron condor' trade is placed accurately using only one contract each for explanation purposes:

Reverse Iron Condor Construction

  • Buy 1 OTM Put
  • Sell 1 OTM Put (Lower Strike)
  • Buy 1 OTM Call
  • Sell 1 OTM Call (Higher Strike)

Here, I would like to show you the consistent and remarkable results this trade has brought on a weekly basis, starting from the first week of January 2011. Listed will be the strike prices used and overall return/loss weekly, along with the allocation of investment on each trade. This is definitely the type of strategy that you will want to use consistently, not one where you will want to enter some weeks and not another.

Here is the week-by-week comparisons. I am sure you will be very impressed at the ROI this trade provides: (Note: I will first use the starting funds, followed by the strike prices used, etc. )

(Click charts to expand)

This is the type of information with data that has a solid back-testing rigor to it. If you do plan to use this strategy, I would suggest that you be consistent with it. Entering one week and not the next would somewhat take away the profit potential. You will have weeks where it will lose, but as I mentioned earlier, it is easy to manage.

I would like to thank Jayanth for providing a lot of the weekly data here. I was going to write an article about this trade much earlier, but got extremely busy and waited.

If you have any questions about this trade or any other, please leave a comment or e-mail me. Thanks again.

Disclosure: I am long GLD, VXX.