Last week was another roller coaster ride for the equity market and subsequently the volatility markets. The VXST – VIX – VXV – VXMT volatility curve shifted back into contango and shook off a mild market drop on Friday to stay that way. With VIX having a 16 handle, I am beginning to wonder if traders are reaching an exhaustion point from reacting to dramatic down days in stock prices.


The long volatility funds such as VXX had a tough week losing around 9%, again despite the market drop on Friday. Even VXZ came under some pressure as the longer end of the volatility curve lost value as well.

Options ETNs

Late Friday, as I was looking for something to write about this weekend, someone came in with an interesting trade in VXX for next week. There was a buyer of VXX at 32.10 who sold the VXX Jan 30th 33 Call at 0.80. I am well aware that covered calls are not exactly the most exciting trade going, but looking to next week and some stats about VXX, the logic makes some sense.

This weekend there are elections in Greece which is an area of the world that has caused market volatility over the past few years. In addition there is a two day Fed meeting that ends on Wednesday and there are several economic numbers over the course of the week. Finally, next week represents the busiest part of the fourth quarter earnings reporting season.

VXX PO Fixed

So why I find this trade interesting starts with the downside. The break even for this trade is 31.30 or down 2.5%. A couple of strong days for VXX and 31.30 could be far in the rear view mirror. The upside is capped at a gain of 1.70 which is close to 5%. If we get a big move to the upside in VXX the time value for the VXX 33 Call will move down to close to nothing allowing the trade to be exited for a profit by the end of the week. Finally, if VXX comes in quickly, the trader can always roll down their short call to try to salvage something from the trade. A covered call is considered dull by many traders, but like everything else in the volatility space it can be pretty dynamic.