Is a $VXX ramp in the works? How my position will be adjusted if volatility continues to rise.

• Posted by chicagosean
• on August 12th, 2010

On Monday, it looked like a safe bet $VXX was going to continue its slow trickle down to my downside breakeven point around $19.95 and quite possibly hit it this week.

As they say on ESPN: “That’s why they play the game” (or something like that).

Fast forward to 2:30pm CT today (Thursday), and $VXX rallied as high as $23.80 (a 13%+ rise off of Monday’s low). So perhaps now is a good time to discuss what the game plan is if the market sees continued volatility and $VXX rises further.

But first a moment to vent:

Yesterday’s broad market sell-off pushed $VXX right to my $23.00 strike – the MAX PAIN point at next week’s expiration. So that sucked. But everything looked good as the market gapped down large in pre-market this morning and $VXX opened up around $23.75. However, the market has had a different idea and (as of this writing) has rallied pretty good all day. And $VXX has plummeted back to – you guessed it – $23.00. Uggg. Here’s the current Risk Profile graph:

Short $VXX stock, long Aug 23 Calls

If $VXX remains around here through the end of next week, max pain will be inflicted on this position. That sucks. But we’ll survive to play another day. Anyway, back to the program.

The game plan if volatility continues to rise

In hindsight, it looked like a good time to short some $VXX at the open today to adjust my position back to delta neutral and raise my downside breakeven point. However, I’m only blessed with this knowledge in HINDSIGHT. Truth is, you never know how far a trend will go. Trends tend to last longer and go further than people expect.

If we continue to see $VXX trend higher over the next few days, each day I’ll look to sell $VXX on a reversal below the previous days’ low. I’ll only sell enough shares to bring my position back to delta neutral. The reason I’ll wait to sell on a reversal is because of what I said in the last paragraph: you never know how far a trend will go! I’m gonna give it all the room it needs to blow to the upside – if possible. I’ll hate myself if I got too jumpy to sell stock at $24.00 if the market really begins a new leg down here and $VXX explodes up to $27-$28+ a share. So I’ll patiently wait for the market to tell me when to sell, instead of trying to top-tick it.

Now, back to the bunker.

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