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How one trade is playing volatility fund

Chris McKhann (chris.mckhann@optionmonster.com)

Volatility selling has grown in popularity recently, and one example of the trend can be seen in the VXX exchange-traded note today.

The iPath S&P 500 VIX Short-Term Futures ETN is down 4.81 percent in early afternoon trading to $35.23. It is back into a range from Oct. 19, when t climbed off its all-time low of the previous session.

The VXX has been a wildly popular product, but one that typically suffers from structural issues. It is composed of the two nearest-month VIX futures and has a daily roll. So when those futures carry increasing premiums, as they usually do, the fund has a significant negative roll yield.

optionMONSTER's tracking systems detected the sale of 7,000 December 60 calls for $0.33. This trader is betting that the VXX won't be above $60 in coming weeks.

Because those calls are so far out of the money , the trader can still profit even if the VXX rises significantly. The calls could have also been sold against an existing long position in the VXX, but that is less likely in a fund that has a negative long-term expectation. (See our Education section)

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