Implied Volatility (IV) is close to yearly lows as the S&P 500 has rallied off its January lows. One would think that would provide opportunity in the VXX ETF. We tried two different approaches in two separate Market Measures. Our May 3rd, 2016 segment, Getting Long Volatility by Selling Puts in VXX” was not successful and another approach on May 20th, 2016, "VXX-A Diffficult Product to Get Long" was also not successful. We decided to take a page out of the LIZ and JNY playbook and try a variation of a Jade Lizard.
Our study in the VXX compared selling Puts with a 1 Standard Deviation 16 Delta to selling those same puts but adding short wide Vertical Call Spreads using the 20 Delta and 5 Delta strikes. The time period covered was 2009 to the present. We entered positions using the options expiration closest to 45 days to expiration (DTE). We did the comparison during periods when the VIX was below 12, 13, 14 and 15.
A table of the results of selling the naked put and managed at 50% of max profit was displayed. The table showed that even though the probability of profit (POP) averaged around 85% the results were a negative average P/L. A second table displayed the results of selling the put, plus selling a wide call spread, when the VIX was below 12 ,13, 14 and 15 and holding to expiration. The table included the number of occurrences, average P/L and POP. By adding the wide call spread the P/L went from negative to positive although our POP went down. A final table added the element of managing the short put and short call spread at 50% of max profit. This time our POP went up as well as out P/L per day and a shorter trade duration.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on a strategy that proved profitable in the highly liquid VXX.
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