Tuesday, November 16, 2010

iPath S&P 500 VIX Short-Term Futures ETN (VXX) -- Closed

Today, with the stock market moving dramatically lower and thus with volatility (and this VXX holding) spiking higher, a decision was made to sell out of the 300 shares covered calls position in iPath S&P 500 VIX Short-Term Futures ETN (VXX). The results shown below are adjusted for the 4-for-1 reverse split for VXX that occurred on November 9th.

1. iPath S&P 500 VIX Short-Term Futures ETN (VXX) -- Closed
The transactions history was as follows:
10/25/2010 Bought 300 VXX @ $12.37
10/25/2010 Sold 3 VXX Nov2010 $13.00 Calls @ $.70
11/16/2010 Bought-to-Close 3 VXX Nov2010 $13.00 Calls @ $.15
11/16/2001 Sold 75 VXX @ $50.064

The overall performance result(including commissions) for the VXX transactions was as follows:
Stock Purchase Cost: $3,719.95
= ($12.37*300+$8.95 commission)

Net Profit:
(a) Options Income: +$142.60
= (300*($.70-$.15) - 2*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (75 VXX share sold at $50.064):
+$34.85 = ($50.064*75 shares - $12.37*300 shares) - $8.95 commissions

Total Net Profit: +$177.45
= (+$142.60 +$0.00 +$34.85)

Absolute Return: +4.8%
= +$177.45/$3,719.95
Annualized Return: +79.1%
= (+$177.45/$3,719.95)*(365/22 days)

Despite the success with this position, the Covered Calls Advisor does not intend to re-establish any covered calls positions using VXX in the future. When volatility spikes higher, VXX seems to participate at an average of only about one-half. Conversely, when volatility moves lower, the normal contango effect of VIX results in approximately one-for-one percentage move down in VXX. This is an undesirable risk-to-reward profile as related to a long position in VXX. Other covered calls positions will provide a better risk-to-reward opportunity whenever a future increase in volatility is expected.

If you have any comments or questions on this post, please submit them by clicking on the 'comments' link below. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog site. Your comments are always welcomed.

No comments:

Post a Comment