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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.

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