Option Strategist

Low risk VXX and VIXY option strategy: rationale and trade management

This document is part of the “Option Strategist” series where we focus on the management of specific option strategies. In this case we look at how to open a strategy on VXX or VIXY to profit from the expected price erosion driven by VIX futures contango and, more importantly, how to manage this position as the underlying and implied volatilities move.

What’s covered in the document?

We start from describing the fundamentals of the VIX futures market and how these drive price erosion on VXX/VIXY and similar instruments. We then discuss the strategy setup and how to use historical evidence of VXX/VIXY movements to select the best strikes and the best conditions to open our strategy.

Even if this is a strategy with limited risks that can be mantained until expiry, we are option strategist so we also need a trade management plan to adjust our position as the market moves, in order to enhance our risk/reward profile. This will be covered in the second part of the document.

Full table of contents is shown below.

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Disclaimer:

All the information and examples presented in this document should not be considered as trading advice. Trading financial instruments involves risks and should be done with caution and, if possible, with the assistance of a professional advisor. Any trading position taken by using information from this document it is sole responsibility of the trader who initiate the position