Wednesday, March 8, 2017

Established Short Put Options Position in iPath S&P 500 VIX Short-Term Futures ETN

Today, a new position was established in iPath S&P 500 VIX Short-Term Futures ETN (ticker VXX) with a March 24, 2017 options expiration at the $17.00 strike price when the price of VXX was $17.02 and the $17.00 Put options were at $.69 per share.  At that time, the S&P Volatility Index (VIX) was at 11.33, which is only 0.75 above the lowest value it has traded at this year and is also close to its all-time low.  Any increase in volatility in the stock market during the next 2 1/2 weeks will result in an increase in VIX and a very attractive return-on-investment potential for this investment.  These short Puts were chosen since they provide a slightly higher potential return-on-investment result than their comparable Covered Calls.  The Covered Calls Advisor does not use margin, so 100% cash-secured Put options were sold. 

As detailed below, the potential return is +4.0% absolute return in 17 days (equivalent to a +85.7% annualized return-on-investment).
Note: the Implied Volatility (IV) of the options at the time they were sold was 48.5, so these options exceeded the Covered Calls Advisor's minimum threshold of IV>20 by a very wide margin.     

iPath S&P 500 VIX Short-Term Futures ETN (VXX) -- New 100% Cash-Secured Puts Position
The transactions were as follows:
03/08/2017 Sold 10 VXX March 24, 2017 $17.00 100% cash-secured Put options @ $.69
Note: the price of VXX was $17.02 when these Puts were sold

A possible overall performance result (including commissions) for this iPath S&P 500 VIX Short-Term Futures ETN position is as follows:
Stock Cost Basis: $17,000.00
= $17.00*1,000 shares

Net Profit:
(a) Options Income: +$678.55
= ($.69*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If price of VXX is above $17.00 strike price at Mar 24th, 2017 options expiration date): +$0.00
=+($17.00-$17.00)*1,000 shares

Total Net Profit (If VXX is assigned at $17.00 at options expiration date): +$678.55
= (+$678.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +4.0%
= +$678.55/$17,000.00
Annualized Return: +85.7%
= (+$678.55/$17,000.00)*(365/17 days)

The downside 'breakeven price' at expiration is at $16.31 ($17.00 - $.69), which is 4.2% below the current market price of $17.02.

The 'crossover price' at expiration is $17.71 ($17.02 + $.69).  This is the price above which it would have been more profitable to buy-and-hold VXX shares until the March 17th options expiration date rather than selling these Put options.