VXX: Is It The Easiest Options Strategy?
Finance symbols of stock market
Are you intent on becoming an expert trader and making profits from your trading experience? Then you have to be acquainted with the measures of volatility. You will be surprised to find new and exciting terms that help you better predict trade outcomes and pocket volumes of cash in the process.
Measures of volatility can help you bag profits and mitigate your risks. That said, you might not know what a VX tool is and how it can help in your trading strategy. Let’s take a dive into the topic and assess the importance of using this trading tool.
So what is VXX? According to tastytrade, it refers to the Exchanged Traded Note (ETN) that effectively tracks the S&P 500 VIX short-term futures. It is not an ETF or a Stock. It is merely a volatility trading tool that comprises the front VX futures with an accepted weight change sequence.
The thought of volatility trading will likely lead you to the VIX, which tracks the volatility of SPX. While the trading signal and the VIX have a very close correlation, it is different in that it utilizes the VIX instruments that are tradeable.
It is also worth mentioning that the trading option does not track the VIX but offers invaluable insights into the changes in the VIX index along with near-term VIX futures. It applies to the mid-long predictions of VIX futures before their expiration date.
In essence, it enables traders to predict and make bets on short-term volatility compared to lengthy waiting periods in the VIX trading strategies.
How to profit from VX tool Price Decay?
One of the key characteristics of the trading signal is that the price will tend to decay towards zero over time. It is especially true when the VIX futures curve is in Contango.
As such, traders who anticipate an increase in the VIX futures will tend to buy the VX, while those expecting a price decline in the VIX index will sell the trading option. The choice of whether to buy or sell the signal is dependent on other volatility factors such as the Implied Volatility (IV), among others.
Trading the VX Options
To understand the trading option, we will use the example below to illustrate how it works with your existing trading strategies.
Example:
Let’s say that the VXX started to trade higher on the 10th of August, at a value of 41.21. While observing the prevailing trend, a trader decided to buy 50-points for a 15th Oct expiration date (66DTE) for 13.60 (the equivalent of a $1360 cash out).
When the trends indicate a less stable continuity in the VIX futures, the outcome is uncertain. The trader can choose to close the trade on the 15th of September (a month later) and bag the $535 profit when the trading strategy has climbed up to 32.
The trader could have chosen to wait out the expiration date of the VIX futures and bag the $750 profit when the trade closed at 29. However, the critical analysis of the trading signal enabled the trader to cash out the lesser profit they were sure of. This is opposed to waiting for the prevailing trends to favor you in the long run (a trend that could change) and end up incurring losses instead.
Main takeaway
VX tool is a valuable trading tool that can salvage profits before the maturation of the VIX futures. What’s more, this trading signal is not a measure of the VIX index but can provide valuable insights into the changes in the weight of the VIX futures. These insights can warrant making bets that enable you to bag profits way before the maturity or expiration of the VIX futures.