Monday of this week was one of the more exciting days we have had in 2015. That’s probably an understatement since VIX futures volume was the highest it has been this year. When the S&P 500 is down and volatility is up there are traders always looking to take the other side of the move. Either through selling volatility or through getting long the stock market. The iPath S&P 500 Short Term Futures ETN (VXX) market is one instrument that can move quickly to the upside when the S&P 500 is under pressure. The daily chart shows the VXX move on Monday which was 17.6% higher than where it closed four days earlier.

VXX Chart

Taking the other side of a big move is commonly referred to as a fade trade.   This type of trade involves taking the other side of momentum in the market which can be dangerous if the correct risk controls are not put in place.   A vertical spread, whether bullish or bearish, is a common way of fading a big move since the maximum potential loss from the trade is defined when the spread is initiated. When VXX is up tremendously like it was on Monday I go searching for short dated bear call spreads in the VXX option market.

With less than an hour left in the day Monday, and the stock market actually making new lows, there was a seller of 5,000 Bear Call Spreads. Specifically the VXX Jul 2nd 21 Calls were sold at 0.61 and the VXX Jul 2nd 26 Calls were purchased for 0.09 and a net credit of 0.52.


Note in the payoff diagram above that the 21.00 prices level is about 3.5% higher than were VXX was trading when the spread was initiated. As long as VXX was not over 21.00 at expiration this trade results in a profit of 0.52. The maximum potential loss of 4.48 for this trade occurs at 26.00 or higher. However, to reach this price level VXX needed to climb another 28% in three days.