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iPath S&P 500 VIX ST Futures ETN Message Board

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  • momoneymo2 momoneymo2 Nov 12, 2011 4:20 PM Flag


    its the blind leading the blind. he doesn't realize the layers of risk that are built-into this product.
    1.) The Implied Volatility of the calls can skyrocket at any moment.
    2.) A 3 to 4 Standard Deviation event can happen at any time. That would easily rock VXX up 15-20% in one day such as last Wednesday.
    3.) 1987 event was a 20 STD. Deviation event, that can happen .00006% of the time.
    4.) Gamma can also rise and you won't be able to guard against its rise.

    Pros -
    1.) VIX typically is in contango affecting term structure of the VXX about 70-80% of the time.
    2.) Shorted calls expire 75-80% of the time.
    3.) VXX is basically insurance
    4.) Play the role of the house
    5.) A casino wins as the house, but sometimes someone hits the proverbial *jackpot* and the casino is forced to pay out, that is the allure of buying options. To hit the lottery jackpot. However, if you sell options, the gain in your options may get wiped out by one of the aforementioned events.

    So it may seem easy now but make sure you are properly hedged.

    Disclosure - I have a small amount of shorted december calls in the high 60s, but I also learned my lesson back in august-october. This is not *free money*

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    • I respect all of you guys opinions and I know that I do not fully understand as well as I should the magnitude of the risk of trading VXX. I am heavily hedged against my VXX positions and on a daily basis rarely see huge swings in my overall account value.
      Because of multiple Bull put spreads and bear call spreads, when market tanks, I lose very little, and when the market rally's back, I usually get what I loss back, plus a small percentage gain. The gains have been steady over time, and most of that has been from theta decay.
      However, the volatility of VXX has offered me multiple opportunities to set up new short positions, then purchase other spreads to offer at least some protection against the disasters that you mention above.
      I do need to gain a better understanding of how to calculate precisely what my Delta, Vega and Gamma risks are, and how much that might impact my portfolio during the throws of a market crash.
      When I am positioned with a significant amount of holdings with naked VXX calls, you can believe that my overall account is in a position to protect against a major pullback in the market.
      I did luck out, and missed the big jump in the VIX in early August, for I had gone to cash just prior to that, and missed a move that could have been damaging to my account, if played incorrectly.
      I am reluctant to expose the size of my account, amounts of my trades and even specific trades that I make to the general public. But, at this late stage in my current VXX trade , I have shared info on some of my holdings that I typically keep to myself.
      My account is not massive, but large enough to allow me to make the kind of trades that I describe. As you are aware, account must meet certain requirements to place certain trades such as naked calls. You must also reach a high trading level in order to short calls.
      I do appreciate the advice everyone so willingly provides on this board. The comments have certainly inspired me to learn more about the greeks that obviously are essential to understanding ones risks when trading options.

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