Learning to Love a Cruddy Financial Product—VXX

04/10/2015 8:00 am EST

Focus: OPTIONS

Andrew Giovinazzi

Chief Options Strategist, OptionPit.com

Andrew Giovinazzi, of OptionPit.com, shares his thoughts on short-term volatility in relation to the VXX futures, and given the Fed’s comments on Wednesday, what may get hurt as a result as well as the slightly in-the-money put play he thinks may still work out for option traders.

So the Fed came out Wednesday with the ball of confusion.  Some want to raise and some do not. That is fair enough and I am starting to feel like the FOMC manages these messages to such a degree that not umbrage can be taken any party. They want things to be smooth.  Since the Fed has more money than everybody else, they will win.

Since we are a volatility blog, I see the short-term volatility getting hit into the dust. The idea is simple. The VIX future premium is robust and it won’t last. That hurts products like VXX the most.  VXX is ready to fall into the area of another reverse split if the volatility gravity keeps happening.  My thought is that it will.

chart
Charts from VIXcentral.com
Click to Enlarge

VXX is a junky product, but thankfully, it is predictably junky.

The Lesson

The VXX trades on the relative prices of VIX futures. Right now that product could lose serious value. The May VIX future might kill it.

The Trade

Buy a slightly ITM put for VXX and target $23 as the low end for VXX.  My guess is that it works out okay.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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